SECTION 197 AND S197A OF THE LRA
 When do they apply? : s197(1)
= When there is the ‘transfer of a business
as a going concern’
 ‘Business’ = includes the whole or a part of
any business, trade, undertaking or service’
SECTION 197 AND S197A OF THE LRA
As a going concern?
 NEHAWU v University of Cape Town (CC): ‘the
business remains the same but in different hands’
 An objective test having regard to substance and
not form taking into account what has transferred
i.e. activity, employees, customers, tangible and
intangible assets etc.
WHAT IS A S197 TRANSFER? (CONT.)
What kind of transferring transaction?
 ‘Transfer’ = ‘the conveyance of property esp. of
stock or shares, from one person to another’ or
‘the act of transferring or being transferred;
conveyance from one place , person etc. to
another’ - New Shorter Oxford English Dictionary
 ‘a merger, takeover or part of a broader process
of restructuring within a company or group of
companies. Transfer can take place by virtue of
an exchange of assets or a donation.’- Schutte v
Powerplus Performance (Pty) Ltd
‘SECOND GENERATION CONTRACTINGOUT’
UWC
Xtra Clean
‘SECOND GENERATION CONTRACTING
OUT’
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Super Clean
‘SECOND GENERATION CONTRACTINGOUT’
 An initial word of warning: do not get caught up in
the terminology
 The fact that something is first or second or other
generation outsourcing or contracting -out is
irrelevant.
 The test in each case must be whether there has
been the transfer of a business as a going concern
‘SECOND GENERATION CONTRACTINGOUT’: THE BATTLE BETWEEN AUSA AND
SAA
 Aviation union of SA & others v SA Airways (Pty) Ltd &
others (2008) 29 ILJ 331 (LC)
 The facts: infrastructure and support services
transferred (outsourced) to LGM. All employees in those
services transferred by virtue of s197. SAA cancelled
the arrangement in terms of its contract with LGM.
 Importantly, the contract provided that on termination of
the agreement SAA retained the right to transfer certain
services and/or functions back to itself or to a third
party (clause 27.1.1) and to obtain transfer or
assignment from LGM to SAA of all third-party contracts
‘SECOND GENERATION CONTRACTINGOUT’: THE BATTLE BETWEEN AUSA AND
SAA
 AUSA approached the LC for, inter alia, a
declarator to the effect that:
 the termination of the outsourcing agreement between
SAA and LGM constituted a transfer of the whole or part
of the undertaking or services provided to SAA by LGM
under s197 of the LRA.
 And in the alternative, that the award of any of the
tenders of SAA to a third party will constitute a transfer
of a whole or a part of the undertaking or services
provided to SAA by LGM under the provisions of s 197
of the LRA.
‘SECOND GENERATION CONTRACTINGOUT’: THE BATTLE BETWEEN AUSA AND
SAA
 AUSA argued that s197 should also apply to
transfers 'from' one employer to another as
opposed to only those facilitated 'by' the 'old'
employer to the 'new' employer.
 Court held: ‘Although I am in agreement with the
sentiment expressed that s197 should be read so
as to protect the work security of employees
affected by a business transfer, I am of the view
that it is clear from s197 of the LRA that the
legislature had only contemplated a transfer from
the old employer to the new employer and nothing
else (the so-called first generation transfer).’
‘SECOND GENERATION CONTRACTINGOUT’: THE BATTLE BETWEEN AUSA AND
SAA
 Aviation Union of SA obo Barnes & others v SA Airways
(Pty) Ltd & others (2009) 30 ILJ 2849 (LAC)
 Zondo JP: ‘It is difficult for me to see what purpose s
197 can be said to aim to achieve if the protection
which it gives to workers against job losses is as
limited as it has to be conceded would be the case if
the word 'by' in the section was read to mean what it
normally means. In such a case the protection of
workers would be limited to the first outsourcing and
nothing more . . . In these circumstances I am of the
view that s 197 is capable of application in a situation
such as the one under consideration .’
‘SECOND GENERATION CONTRACTINGOUT’: THE BATTLE BETWEEN AUSA AND
SAA
 Davis JA:
‘ An examination of the multiple meanings of the word
'by' indicates that the confident assertion that the
literal interpretation of this section precludes any
possible extension to second generation transfers is
not justified linguistically. The wording of the section
does not necessarily and inevitably support the
exclusive connotation that the transferor has to play
an immediate, positive role in bringing about the
transfer.’
‘SECOND GENERATION CONTRACTINGOUT’: THE BATTLE BETWEEN AUSA AND
SAA
 Davis JA:
‘Assume however, that the word 'by' must be interpreted to
connote a positive action on the part of the old employer (in
this context LGM) as contended for by respondent. On the
particular facts of this case, the requisite positive action was
taken when the initial agreement was concluded between SAA
and LGM which afforded SAA rights to compel LGM to act by
means of a transfer of the business back to SAA or to a third
party . . .
In my view, the approach to s 197 adopted by the court a quo
is neither inexorably congruent with the literal wording of the
section nor with the facts of the present dispute. Hence, the
conclusion it reached cannot be supported .’
‘SECOND GENERATION
CONTRACTING-OUT’
 SA Airways(Pty) Ltd v Aviation Union of SA &
others (2011) 32 ILJ 87 (SCA)
 ‘There was no challenge to the constitutionality of s
197 in this matter. A collateral challenge in the
guise of reading a word to mean something
different is simply not legitimate.’ (par 28)
‘SECOND GENERATION
CONTRACTING-OUT’
 ‘The ‘purposive’ interpretation adopted by the
Labour Appeal Court was aimed, it said, at
preventing abuse. This concern on the part of the
court is misconceived because there is, as SAA
argued, no suggestion of any abuse in the present
case. And even if we accepted that such abuse is
possible, that is no reason to distort the plain
meaning of the section. We accordingly conclude
that the Labour Appeal Court erred in adopting an
approach to the interpretation of s 197 which is at
odds with the ordinary meaning of the words
chosen by the legislature. By interpreting the word
‘by’ to mean ‘from’ the court impermissibly distorted
the meaning of the word.’ (par 32)
‘SECOND GENERATION
CONTRACTING-OUT’
 AND ‘In the absence of a factual basis for the
Labour Court to have concluded that there was a
transfer of a business as a going concern by LGM
either to SAA or to another entity, its decision to
dismiss the application was correct. Accordingly the
Labour Appeal Court erred in upholding the appeal
to it.’
SECOND GENERATION CONTRACTING-OUT
 Aviation Union of SA & another v SA Airways (Pty)
Ltd & others (2011) 32 ILJ 2861 (CC)
 Jafta J:
‘For the section to apply the business must have changed
hands, whether through a sale or other transaction that places
the business in question in different hands. Thus the business
must have moved from one person to the other. The breadth
of the transfer contemplated in the section is consistent with
the wide scope it is intended to cover. Therefore, confining
transfers to those effected by the old employer is at odds with
the clear scheme of the section .’ (at para 46)
SECOND GENERATION CONTRACTING-OUT
 Aviation Union of SA & another v SA Airways (Pty)
Ltd & others (2011) 32 ILJ 2861 (CC)
 Jafta J:
‘Determining the operation of the section with reference to a
single word is not the correct approach to its interpretation.
The whole section must be read in its proper context. Reading
section 197 as a whole in the context of where it is located in
the LRA and paying sufficient attention to its purpose and the
objects of the LRA, reveal that it applies to any transaction
that transfers a business as a going concern. It follows that
the majority in the Supreme Court of Appeal erred in holding
that the section does not apply to second generation
outsourcing agreements.’ (at para 55)
SECOND GENERATION CONTRACTING-OUT
Yacoob J:
‘[i]t cannot be doubted that the word ― “by” must be given its
ordinary meaning. We must ask these questions in the inquiry
whether a transaction in issue contemplates a transfer of
business by the old employer to the new employer. 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? If so, does the obligation
imposed within a transaction, fairly read, 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 these questions is in the
affirmative, then the transaction contemplates transfer by the
transferor to the transferee.’ (at para 113)
SECOND GENERATION CONTRACTING-OUT
 Is there a difference in the approaches?
 Could the approach advanced by Yacoob J be a barrier to
s197 applying to second generation transfers?
 What would happen if, for example, the outgoing contractor
only transferred some employees and equipment, but the
client was responsible for transferring the premises and
opportunity to do the work?
 I.e. must the old employer be responsible for transferring
the whole going concern in order for it to be effecting a
‘transfer ’ within the meaning of s197?
SECOND GENERATION CONTRACTING-OUT
 Harsco Metals South Africa (Pty) Ltd and Another v
Arcelormittal South Africa Ltd and Others [2012] 4
BLLR 385 (LC)
 Facts: Harsco provided services to AMSA related to the
management and processing of slag at various sites. The
contract was put out to tender and Harsco secured one site,
but the others were given to two other service providers who
got two sites each.
 The new contractors were to perform substantially the same
services at the sites
 AMSA was to buy certain assets from Harsco some of which
would be sold on to the new contractors
 The new contractors would employ 300 of H’s 445
employees
SECOND GENERATION CONTRACTING-OUT
 ‘SAA resolves the debate on whether second (and
further) generation outsourcing may in principle trigger
the provisions of s 197. . . Section 197 is triggered
when on the facts there is a transfer by one employer
to another, in circumstances where the transferred
entity is the whole or part of a business, and where the
business (or part of it) is transferred as a going
concern. If the transfer meets these criteria (a matter
for objective determination), the transferee is
substituted automatically and by operation of law for
the transferor as the employer of those of the
transferor ’s employees engaged in the business on the
date of the transfer.’
SECOND GENERATION CONTRACTING-OUT
 ‘In the present instance, none of the parties
contends that the absence of any contractual
nexus between Harsco on the one hand and
Phoenix and Tube City on the other hand is
decisive, or even significant. It is not disputed that
there are components of Harsco’s business that
are to be passed on to Phoenix and Tube City. As I
have mentioned, at least some of the Harsco’s
assets will transfer, as will the majority of Harsco’s
employees. There is therefore a ‘transfer’ for the
purposes of s 197.’
SECOND GENERATION CONTRACTING-OUT
 ‘the factual circumstances particularly to be taken into
account in determining whether the conditions for a transfer
of whole or part of a business as a going concern for the
purposes of s 197 are met are primarily the degree of
similarity of the activity carried on before and after the
transfer and the type of undertaking concerned, and the
question whether or not the majority of the employees are
to be taken over by the new employers. In the present
case, the service contracts concluded between AMSA on
the one hand and Phoenix and Tube City on the other hand
require the new service providers to perform substantially
similar services to those performed by Harsco, at the same
locations, broadly using the same operational methods.
Viewed from an employment perspective, the majority of
Harsco’s’ employees will work for Phoenix or Tube City.’
 Thus a transfer as a going concern
SECOND GENERATION CONTRACTING-OUT
 Practical problems
 How will potential tenderers know how to price and
pitch their bids? i.e. how will they access the
information they need from a potential competitor ?
 Is the client to stuck with the same poor employees ad
infinitum?