In the recent decision of Field Force Marketing v Distell Limited[1] the Labour Court considered whether the termination of a service agreement and the subsequent award of it to another entity constituted the transfer of a business as a going concern as contemplated in section 197 of the Labour Relations Act, 66 of 1995 ("LRA").

Since 2004 Field Force had provided merchandising and shelf packing services to Distell, its sole customer.

In July 2014, Distell informed Field Force that it would invoke a tender process for the merchandising and shelf packing service and that Field Force would have to compete with other service providers in the tender. Distell invited interested parties to address four scenarios, two of which involved taking over Field Force employees and two involved not taking over the employees.

The tender was awarded to Imperial.  As a result, Field Force was given notice of termination of the service agreements. Imperial took 70 Distell employees who had been employed in the merchandising service.

Field Force held the view that the conclusion of the service agreement between Distell and Imperial triggered section 197 of the LRA and that, as such, all of its employees had to transfer automatically to Imperial. Field Force launched an urgent declarator and submitted that section 197 applied because there had been a transfer of a separate, distinguishable and discreet business. Imperial in turn argued that all that had happened was a change in service provider of an outsourced service.

The Court held that section 197 applies when (a) there is a transfer, (b) of a business (or part of a business or a service) and (c) as a going concern and went on to analyse these requirements.

(a) Has there been a transfer?

In deciding this issue, the Court referred to the Constitutional Court's judgment in Aviation Union of South Africa and another v South African Airways (Pty) Ltd and Others[2] in which the Concourt examined two questions:

  1. Does the transaction concerned create rights and obligations that require one entity to transfer something in favour or for the benefit of another or to another?
  2. If so, does the obligation imposed by the transaction contemplate a transferor who has the obligation to effect a transfer or allow a transfer to happen, and a transferee who receives the transfer?

If the answer to both of the two questions is yes, there would be a transfer from the transferor to the transferee.

Applying these two questions to the facts at hand, the Court held that the cancellation of the service agreement between Distell and Imperial did not create rights and obligations that required Field Force to transfer something in favour of or for the benefit of Imperial.

Secondly, Field Force had no obligation to effect or to allow a transfer to happen and Imperial was not the recipient of anything being transferred from Field Force. There would be no transfer of any assets, employees, infrastructure or anything associated with the business of Field Force to Imperial. Imperial was capable of rendering the service to Distell without requiring any of Field Force's employees to be transferred to it.

Whilst the definition of business in section 197(1) includes a "service", Aviation Union held that the section contemplates the transfer of the business that supplies the service and not the service itself.

(b) Business

In Aviation Union, the Court held that the phrase "going concern" must be construed to include not only that the business has changed hands, but that it is exactly the same business that continues to operate.

Significantly, Distell never offered the merchandising service prior to the appointment of Field Force. Such service was thus never part of Distell's business. Whilst the services which would be offered by Imperial included a component of the services previously offered by Field Force, the services would be of a much broader scope.

It follows that the business being transferred must have been a going concern in the hands of the old service provider and have become a going concern in the hands of the new service provider.

(c) Going concern

The Court held that Field Force retained its business of shelf stacking which it would offer to other customers and that Imperial had always had its own merchandising business. All that had transpired in the transaction was that Imperial was simply taking over a service previously rendered by Field Force, which in turn had lost the right to provide that service to Distell.

The Court found that the requirements of section 197 of the LRA had not been met and that there had been simply a change in an outsourced service provider.

Conclusion

A termination of a service contract and the subsequent award of it to a third party may not always constitute a transfer as envisaged in section 197 of the LRA. Should section 197 of the LRA not apply to the transaction in that instance, the outgoing service provider loses the contract but retains its business and would be free to offer the same service to other clients with its workforce intact.

The question as to whether there is a transfer of a business as a going concern is one to be determined with reference to the objective facts of each case. We would recommend that each transaction be carefully assessed so as to gauge whether the provisions of section 197 of the LRA would apply to the transaction at hand.