Sep 5,2014 / News / Legal Brief

To what extent, if any, can employees be transferred from one employer to another in circumstances where an outsourcing arrangement is terminated with one service provider and another outsourcing arrangement for the provision of the same services is entered into with a new service provider?

SUMMARY

Where a company, Company A, concludes an outsourcing agreement with Company B, such agreement subsequently terminates by effluxion of time and a similar outsourcing arrangement is then concluded with Company C, Company C will be responsible for taking over the employees who previously performed the services – provided it can be said that a transfer of a business as a going concern has occurred as contemplated by section 197 of the Labour Relations Act 66 of 1995, as amended (“LRA”). Factors indicating that a business would have been transferred as a going concern in such circumstances would include the fact that Company C utilises the same premises Company B utilised (and which were owned by Company A), utilises the same computer systems and other equipment and carries out the same business Company B previously performed.

COURT’S DECISION

In the case of TMS Group Industrial Services (Pty) Ltd t/a Vericon v Unitrans Supply Chain Solutions (Pty) Ltd and Others (JA58/2014) [2014] ZALAC 39 (6 August 2014) Nampak Glass Pty Ltd (“Nampak”) entered into an warehousing agreement with Unitrans Supply Chain Solutions (Pty) Ltd (“USC”). Nampak owned the premises and equipment utilised by USC to provide the services in terms of the agreement. The service had previously been conducted internally but was outsourced to USC. The employees engaged to provide this service were employed by Unitrans Household Goods Logistics (Pty) Ltd (“UHG”), a wholly-owned subsidiary of USC. These employees worked exclusively for Nampak. The agreement between USC and Nampak was subsequently terminated by effluxion of time.

Nampak subsequently entered into a new agreement with TMS Group Industrial Services Pty Ltd t/a Vericon (“Vericon”). TMS was now responsible for the provision of warehousing and distribution services to Nampak. A dispute subsequently arose between the parties as to whether the employees previously providing the services to Nampak had been transferred to Vericon. Vericon expressly denied that this had occurred.

The court a quo, however, disagreed with Vericon, finding that there had in fact been a transfer of a business as a going concern and that the employees had transferred to Vericon by operation of law. The court a quo found that the same services were provided by Vericon that USC had performed and the same assets were also being utilised (the assets were owned by Nampak). The court found that the warehousing service provided by Vericon to Nampak constituted an economic entity, or, put another way, an organised grouping of resources. This comprised at least the contractual right to perform the services, the assets owned by Nampak (but used by the affected employees), the specific activities performed by the affected employees and the employees themselves. In other words the infrastructure used to perform the services passed from USC to Vericon. Vericon, in turn, was distressed by the decision and took the matter on appeal.

On appeal Vericon alleged, among other things, that no business had been transferred as a going concern and that it simply provided a service to Nampak. Vericon further alleged that it did not take over any of the employees previously providing the services; nor did it take over any assets goodwill or intellectual property. Rather, it had engaged entirely with its own resources in performing the services.

The court, in agreeing a quo, stressed that one needed to look at the substance rather than the form of the agreement. The court found that the warehousing operation services constituted a discrete business. Vericon had assumed the right to use Nampak’s assets and infrastructure in order to continue to provide the same service to Nampak as had previously been provided by USC. The services could only have been performed at Nampak’s production facility and Vericon was required to use the same equipment and IT Systems that USC had utilised – including forklifts, computers, printers, a computer system as well as other assets such as furniture.

A further argument that the court was required to consider was the extent to which USC and UHG should be treated as the same entity for the purposes of the proceedings. Vericon argued that the employees were employed by UHG and that the operation and functions of UHG were not dependant on the operation and functions of USC. Therefore, the affected employees should be retained within UHG. The court, in disagreeing with this approach, held that UHG was a wholly-owned subsidiary of USC, that the employees only performed services for Nampak and that USC was actually the de facto employer of the affected employees. To hold otherwise would allow for an abuse of section 197 of the LRA.

IMPORTANCE OF THE CASE

This case reiterates and reasserts the nature and scope of application of section 197 of the LRA. It is clear that should the factors discussed in this judgment be met, a transfer of a going concern can be said to occur in outsourcing arrangements.