CONTRACT TRANSFERS CAN CONSTITUTE SECTION 197 TAKEOVERS

CONTRACT TRANSFERS CAN CONSTITUTE SECTION 197 TAKEOVERS

Section 197 of the Labour Relations Act (LRA) places heavy responsibilities on the employer who takes over the business (or part thereof) of another employer as a going concern. This section forces the new employer to take over all the labour related obligations of the old employer. 

The term “business” in this context includes any employer’s undertaking be it big, small, profit-making or non-profit, unionised or not, private or government. 

However, not all takeovers fall under this legislation because not all are transfers ‘as going concerns’. It is vital for employers to know which transfers do and do not fall under this legislation because they need to know: 

  • whether the new employer will be forced to take over all the old employer’s employees and 
  • whether the new employer will have to recognise and preserve all the benefits, remuneration, working conditions, years of service and other rights of the employees.

Unfortunately the LRA does not define what a transfer ‘as a going concern’ is. This causes great confusion and sparks many disputes between employers on the one hand and employees and trade unions on the other. That is, takeovers often cause loss of jobs and employees are often desperate to stay on with the new enterprise. On the other hand, the new entity very often already has its own staff and wants to avoid the expense of taking on additional employees. 

However, the statutes are not clear enough to tell the parties whether the new entity must or must not comply with section 197 of the LRA. We have therefore offered below our view as to what circumstances would be likely to characterise a merger or takeover as the transfer of a going concern.

  • Where the transfer agreement itself labels the takeover as ‘a transfer of a going concern’ this would be significant.
  • Where the new entity took over the assets (tangible or intangible) of the old entity and continued to serve the same users of the business as had been served by the old entity this would indicate a section 197 transfer.
  • If the new undertaking continued the running of the business as a going concern in much the same way as it had been run before the takeover of a going concern this would point to the takeover of a going concern. 
  • Such a takeover would also be likely to qualify if the new undertaking served the same clients or the same client market as did the old undertaking.

Where a section of an undertaking is transferred this could also qualify as a takeover of a going concern under certain conditions. In the case of Crossroads Distribution (Pty) Ltd t/a Jowell’s Transport vs Clover SA (2008,6 BLLR 565), Clover had a contract to provide transport and  logistical services to Woodlands Dairy. When Clover terminated its contract with Woodlands Dairy, Woodlands awarded the contract to another company called Crossroads. Crossroads wanted all of Clover’s employees in the transport & logistics section to be transferred into its employ because the transfer of the contract from Clover to Crossroads constituted a takeover of a going concern but Clover wanted to retain the services of some of them. The Labour Court found that:

  • Second generation takeovers do not normally constitute takeovers as going concerns and therefore do not fall under section 197 of the LRA.
  • The fact that, after the take over Clover allowed Crossroads to use its premises and sold some of the furniture at the premises to Crossroads did not mean that this was a takeover as a going concern.
  • While the LRA provides that transfers of a service can constitute takeovers as going concerns for purposes of section 197 the transfer of contracts cannot constitute such a takeover.

 

Previously it could have been very good business for enterprises to enter into a take-over deal. However, under the confusing and very unclear interpretations of the law, the potential advantages of takeovers have become very much more uncertain. The Constitutional Court’s more recent SAA decision shows that second generation outsourcing can constitute a section 197 transfer.

This means that would-be buyers of businesses as well as contractors looking to take over catering, security, cleaning, construction and other services do not know if they are coming or going. Due to these concerns such employers should not enter into takeovers before consulting reputable experts in the labour law field. Our experience is that employers have found to their cost that going it alone is far more costly than getting the right advice.

BY   Ivan Israelstam, Chief Executive of Labour Law Management Consulting. He may be contacted on (011) 888-7944 or 0828522973 or on e-mail address: ivan@labourlawadvice.co.za. Go to: www.labourlawadvice.co.za

EMPLOYERS ARE NOT PROTECTED BY THE CORPORATE VEIL

EMPLOYERS ARE NOT PROTECTED BY THE CORPORATE VEIL

The Labour Relations Act (LRA), in its definition section says that an employee is someone who works for an employer. However, the designers of the LRA failed to define the term ‘employer’. This renders confusing our understanding of what an employer is and what an employee is. Despite the absence of a definition of an employer the LRA uses this term very frequently in placing heavy obligations on the employer by dictating, for example, that:

  • Within 30 days of receiving a notice from a registered trade union the “employer” must meet the union to conclude a collective agreement [Section 21(3)] 
  • An “employer” must disclose to a trade union representative (shop steward) all information relevant to the performance of his/her effectively [Section 16(2]
  • A dismissal is unfair if the “employer” fails to prove the dismissal was for a fair reason or was affected in accordance with a fair procedure [Section 188(1]

It may seem that the reason for the omission of the definition of an employer is that such definition is not necessary because it is obvious. However, more than once, when deciding who is to be held liable, the question of who the employer is has been raised. Is it the contracting company or the contractor’s client? Is it the employment agency or the entity that makes use of its services? Is the closed corporation the employer or is it the members of the cc? Is it the subsidiary company or is it the holding or parent company? The answers to these questions are not always clear cut.

For example, in the case of Group 6 Security Pty) Ltd & another vs Moletsane & others (2005, 11 BLLR 1072) the employee was dismissed after an altercation with the employer. The CCMA ruled that the dismissal was unfair. The arbitrator found that the security company and one of its shareholders were jointly and severally liable for the payment of compensation to the employee and for the employee’s legal costs. The Labour Court, on hearing the review application, ruled that “the veil of a corporate entity may be pierced only when there are allegations of fraud, dishonesty or improper conduct.” In the Group 6 case the Court could find no misdoings. The shareholder who had been found by the CCMA to be jointly liable for the unfair dismissal had merely told the employee that the company was an empty shell and this did not constitute dishonesty. Also, the shareholder had not been a cited party at the arbitration hearing; he had only been a witness. The CCMA had therefore been wrong to make the shareholder jointly and severally liable for the compensation and costs to be paid to the employee.

What would have happened however, if the shareholder had been cited as a co-respondent at the CCMA and if he had been found to have committed an improper act. It is possible that the Court would have allowed the CCMA to look beneath the corporate veil for the person responsible.

In the case of Footwear Trading cc vs Mdlalose (2005, 5 BLLR 452) the employee was dismissed and won an award from the CCMA for compensation. The award was made against the employer, Fila (Pty) Ltd a company closely associated with Footwear Trading. The employee applied to the Labour Court for an order to make the CCMA’s award an order of court. Fila told the Court that it was dormant and that Footwear Trading had taken over certain of its assets. The employee also sought an order declaring Fila and Footwear Trading to be co-employers and therefore jointly and severally liable. Footwear denied that it was joined to Fila claiming that it merely carried out administrative tasks for Fila. The Labour Court rejected this and declared the two companies jointly and severally liable for the compensation payment due to the employee.

Footwear Trading then appealed against this decision to the Labour Appeal Court which found that:

  • The LRA does not define “employer” and that therefore the definition of this term must be derived from the definition of an “employee” which is someone who provides services. An employer is therefore a person who “receives services”. 
  • Legal personality may be disregarded where a corporation is a mere alter ego or conduit for another person 
  • Footwear Trading was in control of the business even if it was a separate legal entity and not technically the employer.
  • Footwear Trading was confirmed to be jointly liable for payment to the employee of compensation and the appeal was therefore dismissed.

 

The above is a warning to employers that the use of subsidiaries, associate companies and other surrogates for purposes of avoiding labour law obligations is extremely risky. It is far wiser to utilise available labour law expertise to ensure that the law is properly complied with so as to make ducking behind technicalities unnecessary.

To observe our experts debating hot labour law topics please go to www.labourlawadvice and click on the Labour Law Debate item in the menu.

BY   Ivan Israelstam, Chief Executive of Labour Law Management Consulting. He may be contacted on (011) 888-7944 or 0828522973 or on e-mail address: ivan@labourlawadvice.co.za

Employers: UNFAIR DISCIPLINE CAN CAUSE CONSTRUCTIVE DISMISSAL

Employers: UNFAIR DISCIPLINE CAN CAUSE CONSTRUCTIVE DISMISSAL

Constructive dismissal means that the employee resigns and claims that the resignation occurred not because the employee wanted to leave but as a result of the employer’s intolerable conduct.

Due to the fact that the employee alleges that the resignation was involuntary and was intentionally or unintentionally coerced by the employer, the resignation becomes a constructive dismissal. It is possible that this terminology originated from the idea that such a resignation submitted under duress can be seen to have been ‘constructed’ or ‘created’ by the employer.

In order to convince an arbitrator or judge that unfair constructive dismissal has in fact taken place the employee must show that:

  1. The employment circumstances are so intolerable that the employee could truly not continue to stay on
  2. The unbearable circumstances were the cause of the resignation of the employee
  3. There was no reasonable alternative at the time but for the employee to resign in order to escape the circumstances 
  4. The unbearable situation must have been caused by the employer 
  5. The employer must have been in control of the unbearable circumstances.

The labour law on constructive dismissal was born out of case law and was later codified in the Labour Relations Act No. 66 of 1995 (LRA). Section 186 (1)(e) includes in the definition of dismissal the situation where “…an employee terminated a contract of employment with or without notice because the employer made continued employment intolerable for the employee.”

It must be stressed that questionable acts of the employer will not always constitute unfair constructive dismissal. This will depend on the extent to which the employer’s conduct falls within the five tests for constructive dismissal outlined earlier in this article.

However, employers need to be careful in interpreting the meaning of these five tests. For example, test number 3, where the employee must show that he had no reasonable alternative but to resign must not be simplistically interpreted. For instance, it is often the case that the employee theoretically has the option of remaining in the employment relationship and referring an unfair labour practice to the CCMA or other tribunal. Where the employee fails to do so and resigns instead, this will not always mean that he has failed test number 3. Passing this test will depend a great deal on whether, under the circumstances at the time, the employee could reasonably have been expected to stay on in the employer’s employ for purposes of referring the unfair labour practice dispute. Truly unendurable circumstances would make such a route unreasonable.

Employees must be equally careful not to misinterpret the law. Where, for example, an employer notifies an employee of a disciplinary hearing this could genuinely be seen as unbearable to the employee. However, a resignation by the employee for purposes of avoiding the disciplinary hearing is unlikely to constitute unfair constructive dismissal. For example in the case of Mvamelo vs AMG Engineeering (2003,11 BALR 1294) the employee was informed that he was to be called to a disciplinary hearing for theft and that criminal charges would also be laid. He resigned and claimed constructive dismissal but lost the case because it was found by the arbitrator that he had resigned to avoid the disciplinary steps of which he had been notified.

However, where disciplinary steps have been taken unfairly and this renders the employment circumstances intolerable this can constitute constructive dismissal. For example, in the case of Solidarity obo Van Der Berg vs first Office Equipment (Pty) Ltd (2009, 4 BALR 406) the employee was found to have been performing his work poorly. As a result the employer decided to stop paying him his salary and replaced it with a commission structure. The employee resigned and went to the CCMA where it was found that the employee had been a victim of unfair constructive dismissal. This was because the employee could not be expected to continue employment under such intolerable circumstances.

Employers need to be extremely careful that they do not discipline employees unfairly. Otherwise the employer might have to pay tens of thousands of rands in compensation and legal costs.

To observe our experts debating hot labour law topics please go to www.labourlawadvice and click on the Labour Law Debate item in the menu.

BY   Ivan Israelstam, Chief Executive of Labour Law Management Consulting. He may be contacted on (011) 888-7944 or 0828522973 or on e-mail address: ivan@labourlawadvice.co.za. Go to: www.labourlawadvice.co.za

Employers: DISCRIMINATION CAN SICKEN EMPLOYERS

Employers: DISCRIMINATION CAN SICKEN EMPLOYERS

Section 6 of the Employment Equity Act (EEA) prohibits unfair discrimination against an employee on twenty arbitrary grounds including race, age, disability, sex and many others.

Discrimination at the workplace need not always be unfair. For example, giving company cars to managers only does not discriminate on arbitrary grounds. Managers who get cars do so because of their senior status in the establishment and other employees are therefore being fairly discriminated against.

Unfair discrimination can take many forms. For example, if an employee is sexually harassed this is a form of unfair discrimination based on sex. If a worker is paid less than his/her colleagues because he is male or she is female this would constitute prohibited gender discrimination. If a job applicant is unsuccessful because he/she is white this could be found to be unfair on the grounds of race. Where an employee is unnecessarily sidelined because he/she is disabled this could be unfair discrimination. It is also contrary to law to dismiss a disabled employee who has been incapacitated due to injuries unless the employer has first made every effort to avoid such dismissal through the implementation of a proper incapacity procedure.

For example, in the case of Standard Bank of South Africa vs CCMA & others (2008, 4 BLLR 356) the employee, Ms Ferreira was dismissed after being injured in a motor accident whilst on duty. Her position was Mobile Loans Consultant, a job that required travelling. After her accident Ms Ferreira found travelling painful and the employer therefore gave her a light administrative post. However, she requested a more responsible position as the admin post was not very challenging. The bank assigned her paper shredding work which she found demeaning and physically painful. She asked for a more comfortable chair and a head set so that she could do telesales but the bank ignored these requests. The bank later informed Ms Ferreira that they were going to transfer her to the loans department but later terminated her employment on the grounds of incapacity due to continuing absenteeism.

The CCMA found that the employer had failed to consult with the employee about the head set and to take reasonable steps to try to accommodate her as was required by Schedule 8 of the Labour Relations Act. The bank also turned down the employee’s application to be placed on early retirement. The arbitrator therefore ordered the bank to pay the employee compensation for unfair dismissal. The Bank then referred a review application to the Labour Court. According to the report the Court found that the failure of the bank to accommodate Ms Ferreira constituted unfair discrimination and that the arbitrator’s decision of unfair dismissal was reasonable. It therefore dismissed the review application and ordered the bank to pay the employee’s legal costs.

The outcome of this case has significance in a number of areas; viz:

  • The labour law is highly protective of employees
  • Where employees have been injured, especially if this occurred on duty, the employer is advised to investigate very carefully the extent of the employee’s injuries and to seek alternative ways of dealing with the employee’s resultant absenteeism.
  • It is insufficient for employers to try to accommodate disabled or injured employees. Employers are required to explore all avenues of accommodating such employees and to do everything reasonable to avoid termination.
  • Where the Labour Court believes that a party has come to Court with a weak case it will not hesitate to award legal costs against it.

 

Employers are therefore strongly advised to engage the services of their most expert labour law specialist in order to:

  • Review all their human resources and industrial relations practices and policies in the interests of checking for weaknesses, incompleteness, unwarranted assumptions and discriminatory aspects. This applies regardless of whether or not such practices appear to be for the good of employees, for the sake of safety, affirmative action or for reasons of inherent requirements of the job.
  • Assess a variety of workplace issues that may require decisions that are practical yet have to comply with labour law. Due to the fact that labour law protections of employees are so broad and so open to judicial interpretation employers need to get expert advice before making any decision that could affect employees directly or indirectly.
  • Ensure that all managers and other decision makers are trained in the endless hidden dangers for employers arising in labour law.

 

Losing unfair discrimination cases in court is not only financially costly but damage to the employer’s reputation and industrial relations can have an even worse effect on the employer’s market position and long-term viability.

To observe our experts debating hot labour law topics please go to www.labourlawadvice and click on the Labour Law Debate item in the menu.

BY   Ivan Israelstam, Chief Executive of Labour Law Management Consulting. He may be contacted on (011) 888-7944 or 0828522973 or on e-mail address: ivan@labourlawadvice.co.za.

BRIBERY AND CORRUPTION AN EMPLOYER’S NIGHTMARE

BRIBERY AND CORRUPTION AN EMPLOYER’S NIGHTMARE

With the current international financial crisis, credit crunch, spiralling prices of goods, job losses and scarcity of new jobs it is not surprising that the use of bribery and corruption for the purposes of satisfying needs is thriving. Frequently, it is employees who are involved in practicing corruption or giving or receiving bribes.

Bribery is defined in the Collins Concise Dictionary as “the act of giving something, often illegally, to a person to procure services or gain influence.” Corruption is defined as “to be involved in bribery or other dishonest practices”. Normally, the word ‘corruption’ is used to refer to the conduct of a  person who accepts a bribe”. Employers are victims of bribery and corruption in a number of different ways:

  • The company buyer could accept a bribe from a supplier in return for agreeing to order the supplier’s products instead of those of other potential suppliers.
  • A company executive could bribe a potential client to award the company a tender.
  • A human resources official could accept a bribe in return for giving a job applicant a post.
  • A government official could be bribed to close a blind eye to safety contraventions or other irregularities.
  • A bank official could be bribed to grant to a client a loan that would not normally be granted due to the client’s failure to qualify for the loan.
  • A building inspector could be bribed to ignore contraventions of building regulations.
  • A judge or arbitrator could accept a bribe in return for making an order, ruling or award in favour of the giver of the bribe.
  • Traffic officers could be bribed to persuade them not to issue a motorist with a traffic fine.
  • Police officers and prosecution officials could be bribed to tamper with evidence or to ‘lose’ case files.
  • A cabinet minister or state official could receive a vehicle or money in return for awarding an armament’s contract to the payer of the bribe.

 

In order to stamp out these practices employers need to bring criminal charges against employees who perpetrate these crimes. However, in addition, employers need to bring disciplinary proceedings against such employees. The latter is necessary because, even if the employees are successfully convicted in criminal court, such conviction does not automatically sever the employment relationship. If the employer wants to rid itself of a dishonest employee it needs, regardless of the outcome of the criminal trial, to do so via an internal disciplinary process culminating in dismissal.

Arbitrators and judges do not normally accept bribes. Instead, they normally uphold the punishment meted out against employees who are guilty of bribery or corruption. In the case of Slabbert vs Ikhwezi Truck Tech (Pty) Ltd (2008, 1 BALR 75) the company’s MD was dismissed for having accepted a gift of a motorbike from one of the employer’s service providers. The accused MD alleged that the presiding officer of the disciplinary hearing was biased due to his desire to take the MD’s position for himself. Despite this and despite the fact that the chairperson of the hearing refused the accused MD the right to be represented by an external lawyer the arbitrator found the dismissal to be fair because the MD’s conduct had been dishonest.

In the unreported case of Tumelo John Semele vs Waterval Smelters (May 2009, Case number NW 405-09) the employee was dismissed for corruption after being found guilty of accepting a bribe in return for referring a mine employee to an outside company to obtain a certificate illegally. The employer’s refusal to allow a union official employed by a sister company to represent the accused employee at the disciplinary hearing.  Despite this and the fact that the employer did not suffer any loss due to the employee’s misconduct the arbitrator upheld the dismissal and refused to award the employee any relief.

In both of these cases the evidence brought before the arbitrators proved that the dismissed employees had in fact received bribes. The outcomes would have been different had the arbitrator’s not been persuaded that the employees were guilty of dishonesty. While the CCMA has shown that it does not tolerate such dishonesty employers should not believe that they can dismiss employees for bribery or corruption merely on the basis of allegations or suspicions. A great deal of work needs to be done before the disciplinary hearing to ensure that the employee’s guilt is proven.

BY   lvan lsraelstam, Chief Executive of Labour Law Management Consulting. He may be contacted on (011) 888-7944 or 0828522973 or on e-mail address: labourlaw@absamail.co.za. Go to: www.labourlawadvice.co.za

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