State-owned entities are not exempt from section 197(2) of the LRA

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Section 197 provides for the transfer of employment contracts upon the transfer of a business. The key question was whether, upon termination of service level agreements between City Power and Grinpal, there was a transfer of business as a going concern as contemplated in section 197 of LRA, which could trigger the requirement that employment contracts be unconditionally transferred to City Power.

In 2003, following a tender process for the renewed electrification of Alexandra Township, Gauteng, known as the Alexandra Renewal Project, City Power awarded a tender to Grinpal for the supply of prepaid metering systems. The contracts came to an end in 2010 and additional 'service level agreements' were concluded for a further period of three years, for the installation of more prepaid meters and for maintenance of the meters previously installed.

City Power subsequently informed Grinpal in 2012 that it was terminating the contracts with immediate effect, alleging that Grinpal had submitted a fraudulent tax certificate. Grinpal initially disputed the validity of the cancellation but, after several meetings and correspondence, the parties agreed to terminate the agreements.

Full handover

The parties also agreed that, since no new service provider had been appointed at the time, there would be a full handover of the entire infrastructure, software and databases relating to the project from Grinpal to City Power. It was further agreed that City Power would, in the interim, conduct the business until a new service provider had been appointed.

When the handover took place, City Power continued to run the business but denied that the Grinpal employees, who had performed the functions of the business before the handover, were transferred to City Power together with the business in terms of section 197 (2) of the LRA.

Grinpal brought an urgent application to the Labour Court for an order declaring that the employment contracts of the employees were transferred to City Power, alternatively the service provider appointed by City Power, in terms of section 197(2) of the LRA. Furthermore, ordering City Power or the new service provider to comply with section 197. The Labour Court upheld the application and matter was appealed to the Labour Appeal Court (LAC) and ultimately the Constitutional Court.

City Power contended that the provisions of section 197 were not applicable to it because it is a municipal entity, which operated like a municipality and it was exempt from the application of the LRA. It argued that it had its own Recruitment and Selection Policy and Procedure governing employment of the staff, as required by the Municipal Systems Act and to act contrary to these would contravene the Municipals Act.

Budgetary constraints

City Power further submitted that whenever it was necessary to effect any change to its head-count, it must be planned and approved at the time of the annual budget as it could not ignore its budgetary constraints and employ personnel that are not necessary for effective performance of municipal functions as required by section 160 (1) (d) of the Constitution.

Grinpal submitted that City Power was not a municipality but a private company established as an external service provider used by the Johannesburg Municipality in the exercise of its statutory obligation to supply electricity to its population. Therefore, according to Grinpal, it was not exempt from the relevant provisions of the LRA.

The Constitutional Court dismissed the appeal and found that there was no merit to the argument that there must be preferential treatment of a municipal entity, or other entity that performs a public function akin to that of a municipality, from the application of section 197. It was stated that there were numerous instances where labour legislation would have budgetary or procedural consequences for all entities, including organs of state. Accordingly, organs of state should, when entering into contracts with service providers, make the necessary provisions or arrangements for legal eventualities like section 197.

It was held that the provisions of the LRA prevail over the Municipals Act in employment matters. This was particularly in light of section 210 of the LRA, which specifically provides that in the event of any conflict between matters dealt with in the LRA and the provisions of any other law, save the Constitution or any other Act expressly amending the LRA, then the provisions of the LRA will prevail.

Avoiding provisions of Act

The court also emphasised that should entities wish to avoid the provisions of section 197(2), they could seek to reach an agreement in terms of section 197(6) of the LRA. Section 197(6) caters for instances where the employer seeks to 'contract out' of the provisions of section 197(2). In terms of section 197(2) the specified legal consequences follow if a transfer of business as a going concern takes place, unless otherwise agreed upon in terms of section 197(6).

The agreement contemplated should in terms of section 197(6), be in writing and concluded between the old employer, the new employer or the old and new employers acting jointly, on the one hand, and any person or body with whom the old employer and new employer are obliged to consult in terms of section 189 of the LRA.

In light of this decision, it is therefore important to note that the LRA is the supreme law in employment related matters and municipalities and state-owned entities are not exempt from section 197(2) of the LRA. Municipalities and state-owned entities cannot rely on budgetary constraints to circumvent the requirements of the LRA. Accordingly, necessary provisions or arrangements must be made when entering into contracts with services providers for legal eventualities contemplated in section 197.

Lastly, in the transfer of business, parties must ensure where it is not the intention that employment contracts are transferred to the new owner, that they contract out of the terms of section 197(2). This must be done by reaching an agreement in writing as per section 197(6) of the LRA.