Landmark ConCourt judgment reinforces employee rights in transfer case

Image source: Vitaliy Vodolazskyy – 123RF.com

This landmark decision upheld previous judgments from both the Labour Court and the Labour Appeal Court, affirming that the employment contracts of the employees, who were dismissed, following the voluntary liquidation of their employer, were rightfully transferred to another company within the employer's group of companies, the Echo Group. This case has important implications for the interpretation of 197A transfers, offering crucial protections for employees during corporate restructurings and liquidations.

Background and legal journey

The case originated when Echo International Management Services (Pty) Ltd (EIMS), was placed into voluntary liquidation by its shareholders and directors in March 2020 and dismissed all their employees with immediate effect, without following the required processes as contemplated in the LRA. The employees of EIMS provided centralised shared services to its clients and to other stakeholders within the Echo Group, who had acquired the underlying Pan African telecommunications business just five months earlier.

Upon EIMS's voluntary liquidation, the employees, represented by Claire Gaul, Bob Groeneveld and Ali Sonday of Fairbridges Wertheim Becker (FWB), argued that the shared services previously performed by themselves transferred to one of the other companies within the Echo Group and that transfer of the shared services constituted a transfer of business under Section 197A of the LRA. Accordingly, the employees sought a declarator order that the employment contracts should be transferred from EIMS to one of the companies within the Echo Group.

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The Labour Court found in favour of the employees, ruling that there was indeed a transfer of business as a going concern, to one company within the group, AOOML, a Mauritius company, trading as Echo International Wholesale (Echo International). The Labour Court thereby ordered Echo International to reinstate the employees with full backpay.

Echo International's subsequent appeal to the Labour Appeal Court was unsuccessful, as was their application for leave to appeal to the Constitutional Court. The Constitutional Court's decision to refuse leave to appeal, accompanied by an order for Echo International to bear the costs, solidifies the position that the employees' rights were protected under the LRA, regardless of the liquidation processes.

Legal significance and employee protections

This case underscores the importance of protecting employees' rights during corporate restructurings, particularly under Section 197A, which addresses transfers in the context of insolvency. The courts consistently found that the substance of the transfer, rather than its form, was key to determining whether a transfer of business occurred. The judgments emphasised that even without a formal sale or contractual transfer, the continuity of business operations and the movement of essential shared services from EIMS to Echo International constituted a transfer of business. This interpretation ensures that employees are not left unprotected when their employer undergoes liquidation or other forms of restructuring.

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The case also clarifies the application of Section 197A in situations where the business, or a part of it, continues under a different entity within the same corporate group. The courts noted that the decision to liquidate EIMS and transfer its operations to Echo International, both controlled by the same group of directors, was a deliberate act of restructuring. This continuity, facilitated by the same group of directors, further supported the finding of a business transfer, ensuring that the employees' rights were preserved.

A tribute to Claire Gaul

This case also holds sentimental value for FWB, as it marks the conclusion of a significant matter that was initially spearheaded by the late Claire Gaul, a former director at FWB who sadly passed away in May 2022. Gaul was instrumental in identifying the relief that should be available to the employees and then initiating the proceedings and setting the strategic direction for the case. Her dedication and legal acumen laid the groundwork for the success that was ultimately realised by writer hereof, who took over the case following her passing.

Bob Groeneveld, a director at FWB and close friend of Gaul, paid tribute to her contributions: "Claire was a remarkable attorney whose commitment to justice and the protection of employee rights was unwavering. Her legacy lives on in the victory we achieved for these employees, and her impact will be felt for many years to come."

The judgment not only provides significant financial relief to the affected employees, who will receive full backpay from March 2020, interest on such payments from when they were due as well as a cost order in their favour, but also reinforces the principles of fairness and protection under the LRA. This victory serves as a crucial reminder that the rights of employees must be safeguarded, even in the face of complex corporate restructurings.