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REPORTABLE

IN THE LABOUR COURT OF SOUTH AFRICA

(HELD AT PORT ELIZABETH)

CASE NO: P 260/10

In the matter between:

ADAM SANDERS Applicant

and

CELL C PROVIDER COMPANY (PTY) LIMITED First Respondent

JOHANNES SMITH / P E RACK 4100C Second Respondent

ADVANCE WORX 119 (PTY) LIMITED Third Respondent

G-WORX 12 (PTY) LIMITED Fourth Respondent

JUDGMENT

DE SWARDT, A J:

The applicant applied to this Court as a matter of urgency on 23 April 2010, inter alia,

for an Order:

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‘directing that the takeover of the businesses of the third and fourth

respondents by the first or second respondent will amount to a transfer of

businesses as going concerns as contemplated in section 197 of the Labour

Relations Act, No 66 of 1995 (‘the Act’);

directing that whichever of the first or second respondents take over the

businesses of the third and fourth respondents, take the applicant into its

employ with effect 1 May 2010 on the same terms and conditions as he is

currently employed;’

The application came before Cele J on 23 April 2010 and after hearing argument on

urgency and, to some extent, the merits of the application, the application was

postponed for hearing on 7 May 2010.

The applicant filed a Notice of Abandonment of Relief in Respect of the first

respondent on 6 May 2010, stating that he no longer sought relief as against the first

respondent, save for costs in the event that it continued to oppose the relief sought

against the second respondent. In the event, the first respondent did not pursue the

matter.

When the application was launched on 23 April 2010, the second respondent was

cited as Johannes Smith (‘Smith’). On the morning on 7 May 2010 the parties agreed

that P E RACK 4100C (‘P E Rack’) would be substituted for the second respondent

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and that all allegations made against, or in respect of, the second respondent, would

be deemed to be allegations made against, or in respect of, P E Rack. It was further

agreed, inter alia, that the application would proceed on the basis that the papers

which had been filed on behalf of the first respondent, would stand as a defence to

the applicant’s claims against P E Rack in its capacity as second respondent, as

though these had been filed on behalf of the second respondent. It is not clear to

me whether P E Rack is merely a trade name adopted by Smith, or whether it is a

partnership, company or close corporation.

When the application was heard on 7 May 2010, the applicant was represented by

his attorney of record, Mr M C Kirchmann of Kirchmanns Inc. The second respondent

was represented by Mr M S M Brassey S C, assisted by Mr M J van As, on instructions

of Deneys Reitz Attorneys.

Whereas the urgency of the matter had previously been in dispute, the second

respondent indicated that it abandoned its opposition in this regard. Objection was,

however, made to a supplementary affidavit filed by the applicant and an affidavit

deposed to by the applicant’s attorney, inasmuch as the Rules do not provide for the

filing of such further affidavits and the leave of the Court had not been sought in this

regard. An affidavit was also filed on behalf of first respondent. Such affidavit was

filed well after the time stipulated in the Order of Cele J. Mr Kirchmann did not

object to the filing of such affidavit.

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The Court has a discretion to allow the filing of additional affidavits which are not

provided for in the Rules. The supplementary affidavit deposed to by the applicant

served to place facts before this Court in regard to developments since the granting

of the Order by Cele J on 23 April 2010. The affidavit deposed to by Mr Kirchmann

dealt largely with the events during the proceedings on 23 April 2010. To the extent

that it is necessary to do so, the applicant is granted leave to file both of these

affidavits.

The first respondent (‘Cell C’), is a cell phone operator which, inter alia, sells air time

contracts, mobile phone accessories, pre-paid hand sets and renewals to members

of the public. In order to do so, it enters into franchise agreements on a country

wide basis. Until 30 April 2010 the third and fourth respondents were franchisees

of Cell C and conducted business under the name and style of Cell C Queenstown

and Cell C King Williamstown, respectively. Applicant was in the employ of these

franchisees as a General Manager, a position he had held since 2002.

In terms of the franchise agreements, the leases in respect of the premises where

third and fourth respondents conducted business as aforesaid, were held by Cell C

and sub-leases were entered into between it and the third and fourth respondents.

Cell C also owned the furniture and fittings in the shops. Third and fourth

respondents, as the franchisees, processed air time contracts on behalf of Cell C and

were paid 10% of the air time fee payable by contracted customers to Cell C. The

franchisees were paid a once-off connection fee whenever a new contract was

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activated and a fee was paid in respect of ‘pay-as-you-go’ air time which was sold on

behalf of Cell C. The franchisees were required to maintain a stock of cell phones

which were handed out to customers when new contracts were entered into. In the

ordinary course of their business, the franchisees dealt with queries and complaints

received from customers of Cell C, inclusive of repairs to cell phones, sim card swops

and account enquiries, irrespective of whether the customer had concluded his/her

contract with that particular franchise operation or not.

The written franchise agreements between Cell C and the third and fourth

respondents expired on 24 January 2005 and 30 September 2008, respectively. The

franchises, however, continued on exactly the same terms and conditions on a

month-to-month basis until April 2010. Earlier in the year, approximately

R800,000.00 was spent in upgrading the premises where third and fourth

respondents conducted business.

During March 2010 Mr Brett Barlow (‘Barlow’), the managing director of the third and

fourth respondents, received notice of termination of the franchises from Cell C in

terms whereof the franchise agreements would terminate on 30 April 2010. The

franchisees were advised by Cell C to terminate the services of their employees by

way of retrenchment, to remove their personal belongings from the premises on 30

April 2010 and to transfer the Telkom landlines at the premises into the name of Cell

C. The third and fourth respondents were obliged to continue the normal running

of the businesses up to 30 April 2010 and to assist in the handing over and transition

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process of these businesses to the new franchisee. The leases in respect of the

premises where business was conducted, remain in place. All in all it was Barlow’s

impression that the businesses which had previously been conducted by third and

fourth respondents, would continue to operate as they had previously, but under

different ownership.

Barlow advised the applicant of the termination of the third and fourth respondents’

franchise agreements on 11 March 2010. Barlow further informed the applicant that

it would be necessary to enter into consultations with him (the applicant) and other

staff members around their retrenchment. Applicant thereupon consulted his

attorney of record who, inter alia, called upon Cell C to acknowledge that section 197

of the Act would find application and that the employment contracts of all of the

employees would be automatically transferred to the new franchisee(s). Cell C

responded by denying that section 197 was applicable inasmuch as it was not buying

back the franchise undertakings from the applicant’s employers, but had merely

terminated the franchises as it was in law entitled to do.

Second respondent’s defence to the applicant’s claim remained that section 197 was

not applicable inasmuch as Cell C had simply terminated the franchise agreements

previously held by third and fourth respondents, whereupon a new franchise

agreement was to be entered into between Cell C and second respondent. It was

alleged that ‘the business of the third and fourth respondents, namely the procuring

of new customers and facilitation of the conclusion of airtime contracts between the

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first respondent and the new customers and the earning of ongoing airtime

commission on such contracts, ended when the applicant (sic) terminated its

franchise agreements with the third and fourth respondent.’ It was argued that ‘the

mere fact that the second respondent will run a business from the same premises

where the third and fourth respondents ran certain of their businesses does not

mean that there has been a transfer of a business as a going concern from the third

and fourth respondents to the second respondent.’ It was pointed out that the third

and fourth respondents had removed all of their possessions and stock from the

premises and that there has been no transfer of goodwill.

Subsequent to 1 May 2010 when second respondent commenced doing business new

contracts of employment were entered into with one Barnard and one Nholaka who

had previously been in the employ of the third and fourth respondents.

Section 197(1)(a) of the Act defines ‘business’ as including ‘the whole or a part of

any business, trade, undertaking or service’. ‘Transfer’ is defined to mean ‘the

transfer of a business by one employer (‘the old employer’) to another employer (‘the

new employer’) as a going concern’. Section 197(2) of the Act provides, inter alia,

that if a transfer of a business takes place the new employer is automatically

substituted for the old employer in respect of all contracts of employment in

existence immediately before the date of transfer.

In National Education Health and Allied Workers Union v University of Cape Town

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and Others (2003) 24 ILJ 95 (CC) at 115 - 118 (‘NEHAWU v UCT’) the Constitutional

Court made it clear that the purpose of section 197 of the Act was two-fold; it was

aimed at protecting workers against the loss of employment in the event of the

transfer of a business and to facilitate the sale of businesses as going concerns by

enabling the new employer to take over the workers as well as other assets in certain

circumstances. It facilitates commercial transactions while protecting the workers

against unfair job losses.

Against this background, the Constitutional Court gave content to the phrase ‘going

concern’ which is used in section 197 and held that what is transferred ‘must be a

business in operation “so that the business remains the same but in different hands”.

Whether or not that has occurred, is a question of fact which must be determined

objectively in the light of the circumstances prevailing in each case. Regard must,

however, be had to the substance and not to the form of the transaction. Matters

such as the transfer of tangible and intangible assets, whether or not employees are

taken over, whether customers are transferred and whether or not the same

business is being carried on by the new employer, are all relevant, but none of these

factors are individually decisive. Moreover, the fact that there is no agreement to

transfer the workforce as part of the transaction, does not preclude the transaction

from constituting a transfer of the business as a going concern within the meaning

of section 197 (NEHAWU v UCT, supra, at 119 - 120 para [56] to [57]).

The Constitutional Court made it clear that the proper approach to the interpretation

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of section 197 is to construe the section as a whole in the light of its purpose and the

context of the Act as a whole. Regard must also be had to the declared purpose of

the Act to promote economic development, social justice and labour peace (NEHAWU

v UCT, supra, at 121 para [62]). In addition, the section must be interpreted against

the background of section 23 of the Constitution, which provides that everybody has

the right to fair labour practices and the requirement contained in section 39(2) of

the Constitution that in ‘interpreting legislation, and when developing the common

law ... every court ... must promote the spirit, purport and objects of the Bill of

Rights’ (Aviation Union of SA on behalf of Barnes & Others v S A Airways (Pty) Ltd

& Others (2009) 30 ILJ 2849 (LAC) at 2857 para [14]).

Over time, the Labour Appeal Court and this Court has elaborated on the basic

principles enunciated by the Constitutional Court in relation to the import and ambit

of section 197. In S A Municipal Workers Union & Others v Rand Airport

Management Company (Pty) Ltd & Others (2005) 26 ILJ 67 (LAC) (‘SAMWU v Rand

Airport’) the Labour Appeal Court referred with approval to the minority judgment of

Zondo JP in the case of NEHAWU v UCT (2002) 23 ILJ 306 (LAC) where reference

was made to whether there was ‘an economic entity’ that had changed hands with

the same economic or similar activities being conducted. In FAWU v The Cold Chain

(Pty) Ltd & Another [1020] 1 BLLR 49 (LC), Francis J described the process around

the determination as to whether or not a transfer has taken place as ‘taking a

snapshot of the entity before the transfer and assessing its components’ and

comparing the picture with the one of the business after the transfer ‘to establish

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whether it is substantially the same business but in different hands’.

In the Aviation Union-case, supra, which concerned second generation outsourcing,

Zondo JP stated that the purposes of section 197, as these have been referred to by

the Constitutional Court, are not served or achieved by an interpretation ‘that entails

job losses or the termination of the continuation of the employment of the employees

who moved with the work ...’. One of the reasons why the Labour Appeal Court

found that section 197 found application in cases of second generation outsourcing

was that the contrary view was destructive of the purposes of section 197, ‘because

an employer who wants to get rid of its employees in a certain part of its business

or who wants to sell its business without the workers would be able to transfer its

business by way of outsourcing to an outsourcee, in which case the contracts of

employment of the employees would be automatically transferred to another

employer. This would be for a certain period, eg six months or a year or more. At

the end of that period the outsourcer would have its business transferred back to

itself without the re-transfer back to itself of the contracts of employment of its

former employees - on the basis of the argument that such transfer is not effected

“by” the old employer and, therefore, s 197 would not apply’ (at 2861 para [25]).

In these circumstances, the Labour Appeal Court construed section 197 as

encompassing the situation where a business was transferred from one employer to

another, rather than to confine it literally to the word ‘by’ as used in the section. It

did so on the basis that a purposive interpretation of statutes, which is the

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interpretation that must be adopted in respect of the Act, permits a departure from

the literal meaning of words or provisions where the literal or ordinary meaning

would clearly defeat or undermine the clear purpose of the statutory provision

concerned (at 2862H-I). One ought not to adopt a construction of section 197 that

is ‘at war with the very purpose of the section’ (at 2864 para [30]).

In the instant case, if one were to take a snapshot of the businesses conducted by

the third and fourth respondents before 30 April 2010, one would find an outlet

selling cell phone contracts, and pay-as-you-go airtime, where customers could bring

in their cell phones for repairs or could enquire about a variety of problems which

they experienced around their use of Cell C’s products. A snapshot taken of the

businesses on 1 May 2010 or on any day thereafter, would reveal a similar picture.

The businesses remained located in exactly the same place, the telephone numbers

remained the same, the nature of the business remained the same. The only visible

difference would ostensibly have been that there were some new faces behind the

counter. Indeed, as Mr Kirchmann pointed out in argument, customers who had

brought their cell phones in for repair prior to 1 May 2010, would collect these after

1 May 2010 once these had been repaired. Potential customers who came into either

of the shops prior to 1 May 2010 to enquire about cell phone contracts, could come

back on, or after, 1 May 2010 to conclude the contract.

Whether one adopts the aforesaid ‘snapshot’ test as formulated by Francis J, or the

concept of an economic entity that changed hands, there clearly has been a transfer

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of the businesses from one person/entity to another. The fact that the stock or

goodwill did not find its way to the new owner, does not in my view detract from the

fact that the businesses changed hands as going concerns, nor does the fact that all

of the employees’ employment contracts have not been transferred. Employment

contracts were clearly not transferred, because the second respondent (and Cell C

for that matter) laboured under the mistaken impression that third and fourth

respondents had to retrench the employees. On an overall conspectus of the

prevailing facts and circumstances, there appears to have been a seamless change

of proprietor in respect of the Cell C outlets concerned.

It is clear that on a literal interpretation of section 197 there has not been any

transfer of a business from the third or fourth respondents to the second respondent.

The franchise agreements pertaining to the third and fourth respondents were simply

terminated and a new franchise agreement was concluded, or is in the process of

being concluded, with the second respondent.

It is equally clear that if a literal interpretation were to be adopted, the purpose of

section 197, to the extent that it is aimed at safeguarding the jobs of employees,

would be defeated. The employees who had been employed by third and fourth

respondents would fall to be retrenched. Moreover, not only would the second

respondent be able to avoid the provisions of section 197, but any franchisee would

be able to jettison troublesome workers with impunity, or would be able to place a

successor in title in a position to ‘cherry pick’ employees. To borrow a phrase from

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Zondo JP, a franchise arrangement would provide the perfect ‘vehicle on which to

load the workers and a place where to dump them’ if an employer wished to sell his

business as a going concern to someone else (see Aviation Union of SA obo Barnes,

supra, at 2892D). Such an interpretation would neither give effect to the right to fair

labour practices which has been enshrined in the Constitution nor would it accord

with the aims and objects of the Act.

In the instant case, Cell C has effectively outsourced its business in the sense that

it has appointed franchisees to conduct business on its behalf. It has now decided

to change the person or entity to whom that business has been outsourced and it is

certainly free to do so. The freedom which Cell C has to conduct its business affairs

in the manner that suits it best, however, cannot detract from the rights of the

employees who are affected by the decisions which Cell C elects to make. These

employees are entitled to the protection afforded to them by section 23 of the

Constitution and the Act.

The following Order is accordingly made:

1. The takeover of the businesses of the third and fourth respondents by the

second respondent is declared to constitute the transfer of businesses as

going concerns, as is contemplated in section 197 of the Labour Relations Act,

No 66 of 1995, as amended.

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2. The second respondent is declared to have automatically taken the applicant

into his/its employ, with effect from 1 May 2010, on the same terms and

conditions as those which applied to his employment with third and fourth

respondents immediately prior to 1 May 2010, as is contemplated in section

197 aforesaid.

3. Second respondent is ordered to pay the applicant’s costs on the High Court

scale as between party and party.

____________________

A M DE SWARDT, A J

10 May 2010

APPEARANCE:

For the Applicant: Mr MC Kirchmann

Instructed by Kirchmanns Inc

For the Respondent: Mr M van As, Counsel

Instructed by Deneys Reitz Attorneys

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