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The New Companies Act, 2008
A foreign company which is a party to an
employment contract in SA
Trade union rights
SASLAW 6 September 2011
© Webber Wentzel 2011
Nick Robb
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Section 23
• Section 23 (1) provides that an external company must register
with CIPRO within 20 business days after it first begins to conduct
business within the Republic:
– as an external non-profit company if, within the jurisdiction in
which it was incorporated, it meets legislative or definitional
requirements that are comparable to the legislative or
definitional requirements of a non-profit company incorporated
under this Act;
– as an external profit company, in any other case
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Section 23
• Section 23 (2) provides that a foreign company must be regarded
as conducting business, or non-profit activities, as the case may be,
within the Republic if that foreign company:
– is a party to one or more employment contracts within
the Republic; or
– subject to certain sections is engaging in a course of conduct or
has engaged in a course or pattern of activities with the Republic
over a period of at least 6 months, such as would lead a person
to reasonably conclude that the company intended to continually
engage in business or non-profit activity within the Republic
Effect of registration
•
Section 23 must be read with Regulation 20. S23 requires an external
company to:
- continuously maintain an office in the Republic;
- register the address of its office;
- be assigned a unique registration number and be maintained on the
register of external companies;
- be subject to a compliance notice from CIPRO should it fail to register
and if in continued default cease carrying on business – anomalous
situation in the context of being “deemed” to be conducting business if
the foreign company does not wish to be held to be conducting business!
Effect of registration
• Registration in terms of Regulation 20 entails:
- filing the required notice and filing fee;
- providing a certified copy of its Memorandum of Incorporation
or similar document, as well as its certificate of incorporation or
comparable document;
- providing the required statement setting out the address of its
principal office outside the Republic and the names and
addresses of its directors;
- providing the address of its registered office in the Republic;
- providing the name and address of the person in the Republic
who has consented, and has been appointed, to accept service
of documents
Effect of registration
• Tax consequences - establishment of an office/conducting business:
- VAT – SARS may rule that the foreign company will no longer
be exempt from registering as a VAT vendor
- s101 of the Income Tax Act – requires appointment of public
officer to represent the employer for income tax purposes if
“carrying on business OR having an office” - foreign company
becomes liable to deduct and pay over income tax in respect of
employees - PAYE
- income tax – complex question on account of bilateral tax
treaties – grey area – could become liable to register as taxpayer
Effect of registration
• Trading / commercial consequences – licensing restrictions,
competitive restrictions
• Fact of a presence
Effect of registration
• Summary
- not too onerous administrative requirements;
- tax consequences - significant
- trading and other concerns – difficult to quantify
The deeming provision
• Dealing only with the first part of the provision – s23(2)(a)
• Requirements to trigger the provision:
- a foreign company
- that is a party
- to one or more employment contracts
- within the Republic
First element
• It must be a “foreign company”
- only applies to incorporated entities
- it must be foreign
Second element
• It must be a “party” to one or more contracts
- a contracting party in the generally accepted usage of the
term
- therefore has entered into an oral or written contract with
the employee
- contract need not have been entered into or concluded in
the Republic – requirement much wider – a party to a contract
which could have been concluded anywhere and at any time
prior to its current operation in the Republic
Third element
• One or more employment contracts
- common law definition (Wallis):
“It is a contract whereby the employee undertakes to place his or
her personal services at the disposal of the employer for a period of
time in return for the payment of an agreed remuneration termed a
wage or salary”
Third element
• Further characteristics in terms of the common law:
- object is the rendering of services
- employee at the beck and call and renders services at the
behest of the employer
- the services are at the disposal of the employer which has the
discretion to decide whether or not it wants them rendered
- employee subordinate, obliged to obey lawful commands orders
and instructions
Third element
- employer has the right of supervision and control by
prescribing what work must be done and the manner in which it
must be done
- it terminates by death of the employee or the expiration of the
period of service (contractual notice, retirement – contractual
term, expiry of agreed contractual term)
Third element
Statutory definitions
• LRA + BCEA – “employee means any person, excluding an
independent contractor, who works for another person or for the
State and who receives, or is entitled to receive, any remuneration;
and any other person who in any manner assists in carrying or
conducting the business of the employer”
• employed and employment have corresponding meanings
• EEA + SDA + UIA essentially identical – COIDA has other elements
but the essentials remain
• s200A / s83A of the LRA / BCEA
Third element
• The test applied by the courts
• Been through various mutations
• Has evolved to its present form consisting of three principal criteria:
– an employer’s right to supervision and control;
– whether the employee forms an integral part of the employer’s
organisation;
– the extent to which the employee is economically dependent on
the employer
(Davis JA in State Information Technology
Agency (Pty) Ltd v CCMA and others)
Third element
• The Davis test is designed to establish the existence of an
“employment relationship” – once established rights flow in
terms of employment legislation
• The deeming provision requires being a “... party to one or more
employment contracts ...” which is / could be a formal
requirement rather than a substantive requirement – i.e. in addition
to the substantive requirement and therefore widens the net
• Is there a distinction between the two as a consequence of the
Companies Act formulation? The formulation could have been “...
the foreign company employs one or more employees in the
Republic ...” – same as the Davis test
Third element
•
Illustration of the possible distinction:
American Co has a subsidiary in SA, SA Co. It seconds employee Mr Woods
to SA Co for two years as he has plummeted from being a star performer to
an also-ran, and needs reinvigoration. In terms of the secondment
agreement SA Co supervises and controls Mr Woods, he is integrated into SA
Co, SA Co pays him his remuneration, and he carries out all duties in SA.
Throughout the term of secondment Mr Woods’ contract with Am Co remains
extant. Am Co conducts no activities in SA
•
In terms of the Davis formulation Mr Woods is employed by SA Co. There is
the possibility of dual employment, with Am Co as well, but is that an
employment contract in SA?
•
Is Am Co party to an employment agreement in SA? Mr Woods retains his
employment agreement with Am Co and is in SA carrying out his duties
albeit for SA Co
Third element
• What if the operation of the employment contract between Am Co
and Mr Woods is formally suspended for the duration? Is Am Co
still party to an employment contract in SA during the period of
suspension i.e. for the secondment?
• What if Am Co retains residual obligations to Mr Woods for the
period of secondment e.g. his 401k plan (state pension), a portion
of his salary is paid into his Florida bank account to pay his bond
and maintenance obligations, and golf and Playboy club subs?
• Does it matter if Am Co is a signatory (party?) to the secondment
agreement in terms of which Mr Woods is employed by SA Co for
the duration
Third element
•
Alternative illustration
– English Movie company used to employ Mr Ritchie in the UK as a movie
director. Mr Ritchie retires to Cape Town. Eng Co has no presence in SA
and no subsidiary company. Eng Co and Mr Ritchie enter into a carefully
crafted independent contracting contract in terms of which Mr Ritchie is
allocated tasks – scouting locations etc. - from time to time and is paid
in the UK. Mr Ritchie’s movie star ex-wife contacts CIPRO. CIPRO
decides Mr Ritchie is an employee of Eng Co based on the Davis
formulation and hence Eng Co is party to an employment contract in the
Republic. Eng Co is required to register and establish and maintain an
office if the arrangement with Mr Ritchie is to continue. Mr Ritchie may
no longer be paid off-shore, is subject to PAYE deductions and Eng Co
subject to VAT and income tax
Third element
•
If the Companies Act formulation is intended to be strictly formal and shall
be interpreted as such then in the case of secondments:
– foreign companies would at the least need to suspend the operation of
their employment contracts for the duration;
– foreign companies should not be parties to contractual arrangements
governing employment for the duration;
– residual obligations in the foreign territory would probably have no
impact since they are serviced outside the Republic
– remuneration should be paid by SA Co – normal practice for foreign Co
to pay and recover from SA Co – that practice could be an unwelcome
trigger
– the Davis test approach is not knocked out – it co-exists
Third element
• On the other hand:
– if the Davis formulation only is to be applied – “party to an
employment contract” means “employed” in SA
– not required to contrive a set of facts in the case of
secondments but independent contracting contracts with foreign
companies subject to scrutiny
– “You be the Judge” (per Davis JA)
Fourth element
• Within the Republic
–
employee’s duties and obligations carried out in SA
–
employee obtains rights in terms of SA legislation?
• What if the secondment agreement expressly disavows applicability
of SA legislation, sets up an appropriate dispute resolution
mechanism on foreign soil, provides for the governing law to be that
of Switzerland (e.g. the Red Cross)?
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Trade union rights in the Companies
Act
Trade union rights
• Rights are afforded trade unions registered in terms of s96 of
the LRA – definitions section
• Part B of Chapter 2 – Incorporation and legal status of companies
– in terms of s20(4) a trade union representing employees of the
company has the right to apply to the High Court for an appropriate
order to restrain the company from doing anything inconsistent with
the Act
• Part C of Chapter 2 – Transparency, accountability and integrity of
companies – in terms of s31(3) trade unions must be given access
to company financial statements for purposes of initiating a
business rescue process
Trade union rights
• Part D of Chapter 2 – Capitalisation of profit companies – in terms
of s45 (loans or other financial assistance to directors) – if the
board authorises the company to provide direct or indirect financial
assistance to a director or prescribed officer, it must provide a copy
of the resolution to that effect to the trade union
– either within 10 business days if the value of the loan, debts,
obligation or assistance exceeds .1% of the company’s net worth
– or in any event within 30 business days after the end of the
financial year
Trade union rights
•
•
Part A of Chapter 6 – Business rescue proceedings – a trade union is
defined as an “affected person” in relation to an company – s128(1)(a)(ii)
An affected person acquires various rights
- to receive the resolution of the board to begin B R proceedings
- to be told why the board has not passed such a resolution
- to apply to set aside the resolution
- to apply to set aside the appointment of the practitioner or require her
to provide security
- to be notified of any application for B R
- to participate in the hearing of any application
- to apply to court for an order placing the company under supervision
and commencing B R proceedings if the company does not
Effect of B R proceedings on employees
•
Employees remain employed on same terms and conditions except to the
extent that
- “changes occur in the ordinary course of attrition”
- employees and the company agree different terms in accordance with
applicable labour laws
•
Any retrenchment accords with ss 189 or 189A – of course!
•
A practitioner may not suspend an employment contract
•
A court may not cancel any provision of an employment contract
•
Employees are preferred unsecured creditors in respect of any
remuneration, reimbursement for expenses or other amounts relating to
employment due and owing immediately before B R proceedings began
Trade union rights
• Part A of Chapter 7 - Protection for whistle-blowers
- a trade union that makes a disclosure contemplated in the section
(s159) has qualified privilege in respect of the disclosure and is
immune from any civil, criminal or administrative liability in terms
of such disclosure
- the disclosure must be made in good faith to CIPRO, the
Companies Tribunal, the Panel, a regulatory authority, an exchange,
a legal adviser, a director, prescribed officer, company secretary,
auditor, internal audit, board or committee of the company
Trade union rights
- subject matter – similar to the PDA – less comprehensive
- trade union must reasonably believe at the time of disclosure that
the information showed that the company or director or prescribed
officer:
- contravened the Act, Close Corporations Act, Share Blocks
Control Act, Co-Operatives Act, Copyright Act, Performers Protection
Act, registration of Copyright in Cinematograph Films Act,
Counterfeit Goods Act, Designs Act, Merchandise Marks Act, Patents
Act, Trade Marks Act, Unauthorised Use of Emblems Act, “Vlaglied”
Copyright Act, Protection of Business Act, Part A of Chapter 4 of the
CPA
Trade union rights
- failure to comply with any statutory obligation to which company
subject
- conduct endangering health or safety or the environment
- unfair discrimination or condoning unfair discrimination
- contravened legislation which exposes the company to actual or
contingent liability or is inherently prejudicial to its interests
Trade union rights
• Part B of Chapter 7 – Application to declare director delinquent or
under probation [s162(2)] – a trade union may apply for an order:
- declaring a director delinquent if the director consented so to act
whilst ineligible or disqualified, continued to act whilst under a
probationary order, grossly abused the position, took personal
advantage of information or an opportunity, inflicted harm upon the
company either intentionally or grossly negligently, acted in a
manner amounting to gross negligence, wilful misconduct or breach
of trust in the performance of functions and duties [s162(5)(a) to
(c)]
Trade union rights
- placing a director under probation if the director acted in the
manner set out in s162(7), subject to the provisions of
s162(8) – too detailed to summarise conveniently
Trade union rights
• Derivative actions – s165(2) – a trade union may
– serve a demand on a company to commence or continue legal
proceedings, or take related steps, to protect the legal interests
of the company
– a company so served may only apply to set the demand aside on
grounds it is frivolous, vexatious or without merit
– if not the company must commission a report and within 60
business days either initiate or continue proceedings, or refuse
to comply with the demand
– the trade union may apply to court to bring or continue
proceedings in the name and on behalf of the company
Trade union rights
– in exceptional circumstances the trade union may forgo the
demand process and apply to court to bring proceedings in the
name of and on behalf of the company
– rebuttable presumption that granting leave not in the company’s
best interests if
• proceedings are against or by a third party;
• the company has decided not to bring or not to defend or
to discontinue settle or compromise such proceedings; AND
• all of the participating directors acted in good faith, had no
personal financial interest, informed themselves about the
subject matter and reasonably believed the decision was in
the best interests of the company
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Contact details
•
•
•
•
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Nick Robb
Partner
Webber Wentzel
Tel. (011) 530 5627
Email nick.robb@webberwentzel.com
Legal Notice: these materials are for training purposes only and do not constitute legal or other professional advice.