THE APPLICATION OF SECTION 197 OF THE LABOUR RELATIONS ACT IN AN OUTSOURCING CONTEXT (PART 1)
Authors: Lynn Biggs  
Published: October 2021

Section 197 of the Labour Relations Act (LRA) in both its original form and in its current form caused much confusion and debate. Originally it was interpreted that section 197 allowed for the automatic transfer of employees in cases where there was a transfer of the whole or part of a business, trade or undertaking as a going concern. That meant that the contracts of employment transfer to the new owner and that the employees could not refuse to be transferred. Various judges were tasked with interpreting this section in its original form and thus different interpretations emerged, with the Labour Appeal Court ultimately deciding in the NEHAWU v University of Cape Town matter that employers involved in the transfer can decide between them, not to transfer the employees. The LAC further held that “outsourcing” does not necessarily entail a transfer of a business. Section 197 was amended in 2002 and the effect of the provisions is that the old employer is not required to seek the consent of the employees before their contracts are transferred and that the employment contracts transfer automatically. However, the current section has also raised some difficulties especially relating to: when does a transfer of a business as a going concern take place; what constitutes a “business”; when is an entity part of a business, trade, undertaking or service? A more glaring controversy relates to whether section 197 applies to “second-generation contractingout or outsourcing”. All provisions of the LRA should be interpreted in the context of advancing economic development, social justice, labour peace and democratisation of the workplace. One of the primary objects of the LRA is to give effect to and to regulate the fundamental rights of the Constitution of the Republic of South Africa, 1996. Thus section 197 is to be interpreted in light of the objectives of the LRA as well as to promote the spirit, purport and objects of the Bill of Rights. The common law and international law are both important sources of comparison. The common law allows employers who transfer businesses free to decide whetheror not the transfer will include the employees of the transferor. International law, particularly the European Union and the United Kingdom, favour the approach that when an entity is transferred, it retains its identity after the transfer and the safeguarding of employee rights in the context of business transfers. European and English jurisprudence have shown that almost any combination of events can constitute a transfer of a business.Case law regarding the current section 197 once again raised debate especially relating to the interpretation of the word “service” which was added to section 197 by the amendment. The LAC in the SAMWU v Rand Airport Management Company ruled that a contract to outsource for example gardening functions is a service within the meaning of section 197. Thus such arrangements could result in the automatic transfer of affected employees from the outsourcer to the contractor.Further confusion and debate have arisen as a result of the decision of the COSAWU v Zikhethele Trade (Pty) Ltd matter which held that there may be automatic transfers in cases of second-generation outsourcing, meaning when the outsourcing contract changes hands from one contractor to another, section 197 would apply and employees concerned would transfer automatically. The implicationsof such an interpretation could have vast consequences. In conclusion, it all boils down to the interpretation and application of section 197. Some authors are of the view that section 197 should be widely interpreted; thus the proper protection of employee rights may require the courts to construe section 197 more widely than narrowly. The preferred interpretation is that of Wallis who is of theview that section 197 should be confined to the transfer of businesses and to that subject alone.