As companies are faced with present day economic difficulties during these trying times, many will be looking for a way to alleviate their duties of dealing with the day to day issues and hassles regarding employees in order to concentrate on the running of their core business. One such method of doing this is to utilise the services of a Labour Broker by means of outsourcing all of your labour functions and the outsourcing company would be responsible for looking after the employees' terms and conditions of employment. However, is this a simple exercise? Are there provisions that restrict the employer from making such decisions to suit the company's profitability? Can a company retrench its staff and outsource the function? In this article we shall explore these questions and many of the issues surrounding the topic of outsourcing.

It constantly seems to fall into question whether or not the outsourcing of staff amounts to the sale of a business, thereby bringing into play section 197 of the Labour Relations Act, 66 of 1995 which governs the regulations that the business owner has to comply with in terms of law. Indeed it must be said that before the 2002 amended version of the Labour Relations Act 66 of 1995, outsourcing did not fall under section 197 and employers that made decisions to outsource their staff did not have to follow these provisions. This means that before the amended version, employers could retrench staff due to "operational requirements" and outsource that function without any consequences from the law. However, after two cases, namely: NEHAWU v University of Cape Town and Others 2003 24 ILJ 95 (CC), a matter which was eventually heard before the Constitutional Court, as well as SAMWU and Others v Rand Airport Management Company (Pty) Ltd 2005 26 ILJ 67 (LAC), heard eventually before the Labour Appeal court, employers can no longer do this.

The Labour Appeal Court in SAMWU and Others v Rand Airport Management Company (Pty) Ltd, where the company retrenched its garden and security personnel in order to outsource the function, held that the take-over of any service forms part of a sale of a business as a going concern. What this means is that all employees who provide "labour" to a company are now viewed as employees providing a "service" to the employer, and thus the outsourcing of staff also forms part of a sale as it amounts to the sale of a "service" of a business. Furthermore, in NEHAWU v University of Cape Town, the Constitutional Court specifically stated that the provisions of section 197 of the Labour Relations Act have been designed to protect workers against job losses. Thus, employees must be transferred to the outsourcing company and actually become employees of the outsourcing company if companies wish to outsource their labour.

The provisions that must be followed under section 197 are as follows:

If a transfer of a business takes place, unless otherwise agreed;

  • the new employer is automatically substituted in the place of the old employer in respect of all contracts of employment in existence immediately before the date of transfer;
  • all the rights and obligations between the old employer and an employee at the time of the transfer continue in force as if they had been rights and obligations between the new employer and the employee;
  • anything done before the transfer by or in relation to the old employer, including the dismissal of an employee or the commission of an unfair labour practice or act of unfair discrimination, is considered to have been done by or in relation to the new employer; and
  • the transfer does not interrupt an employee's continuity of employment, and an employee's contract of employment continues with the new employer as if with the old employer.

One cannot therefore outsource and overlook the provisions of section 197 of the LRA which state that employees must transfer on the same terms and conditions as before to the new employer, who in this case would be the outsourcing company. What then would happen if the company continued to retrench employees in order to outsource their functions?

Since outsourcing falls under section 197, the following is then applicable:

Under section 187 (1) (g), a section in the Labour Relations Act dealing with automatically unfair dismissals, an employer cannot dismiss any employee for any reason related to a transfer as contemplated under section 197. This means that if the employer retrenches employees in order to outsource the function, the employer may very well find himself at the Labour Court for an automatically unfair dismissal. The penalty for this can be up to 24 months compensation and the company may not have the right to defend itself in terms of "fair dismissal" as the dismissal is automatically unfair according to the law.

Therefore, if an employer attempts to force an employee to transfer under less favourable terms and conditions than before, and should the employee refuse to transfer, 187 (1) (g) prevents the employer from retrenching that employee. However, due to the fact that section 197 clearly states that the employee transfers on the same terms and conditions unless otherwise agreed, if the employee consents to transfer on less favourable terms, the employer has observed the provisions of the law and is not at risk. It is therefore advisable to all employers to consult with Labour experts in regards to these issues of Law.

A general question that normally arises pertains to the years of service. Which employer, either the old or the new is responsible for the years of service in the event of a future retrenchment?

In recent case law, the Labour Court ruled that the outsourcing company or the new employer also takes over the years of service and there is no break in employment for the employee. An employer therefore cannot trick an employee into resigning before transferring over to the new employer in order to remove the liability of "years of service" in the event of a retrenchment. It may very well be that the new employer will still be liable for years of service the employee had with the old employer, unless the bearer of the liability is specifically referred to in an agreement between the old and new employer.

If you are thus contemplating outsourcing your employees, contact your Labournet consultants to assist you in this regard.