This case examined whether a transfer as a going concern in terms of section 197 of the Labour Relations Act 66 of 1995 (LRA) applied when a municipality outsourcing the provision of bulk water supply through a tender, allowed the outsourced service provider to use its assets. It raised the question of whether the return of the assets belonging to the municipality at the expiration of the tender determined the existence of a transfer.

Key facts

In the King case, King Cetshwayo District Municipality (Municipality) awarded a tender to Water and Sanitation Services South Africa (Pty) Ltd (WSSA), which was responsible for the management, operation and maintenance of water and wastewater treatment facilities. This contract extended over three tenders and thereafter was extended annually until another service provider took over.

At the time of the third tender, the Municipality and WSSA concluded a service-level agreement (SLA). WSSA raised the issue of section 197 at the termination of the SLA. It submitted that if its employees were not transferred to the Municipality, then they should be transferred to the new service provider in terms of the SLA which stated: “All affected employees currently employed by [WSSA] will be given the following options: to be redeployed within [WSSA] or to be transferred to the new operator.”

Section 197 of the LRA

In order for a section 197 transfer to take place, there needs to be a business, trade, undertaking or service that is transferred as a going concern.

The Labour Court’s decision

The Labour Court found that the assets which were owned by the Municipality but used by WSSA such as boreholes, pipes and reservoirs were the essential components of the business of supplying bulk water services. The return of these assets at the termination of the SLA constituted a transfer of a business as a going concern, as these assets were critical to provide the service.

The Labour Appeal Court’s decision

The Labour Appeal Court’s (LAC) evaluation focused on two points. First, whether the return of assets owned by the Municipality to it by WSSA constituted a transfer for the purposes of section 197. Second, if such a return did constitute a transfer, whether all the necessary assets were returned, as WSSA did not return its own assets that had also been used.

The LAC agreed with the court a quo’s finding that the causa potentially giving rise to the section 197 transfer was the termination of the SLA. Furthermore, that the business and/or services was the provision of the bulk water supply and related services.

The nature of the business is an important consideration as there is a distinction between labour-intensive services and asset-reliant services. The court stated that the fact that employees were not transferred would be of no consideration if it was found that the business was asset reliant.

The business of supplying the bulk water services was found to be a going concern, as there was no difference in how the business was conducted before and after the expiry of the SLA.

The LAC now had to decide whether the business was transferred from WSSA to the Municipality upon the expiry of the SLA. It also had to determine whether the assets that were retained by WSSA were core assets that were required to be transferred in order for the same business to continue operating after the expiry of the SLA.

The LAC agreed with the court a quo that the retained assets were not core assets required for the business and therefore all three requirements for a section 197 transfer were present. Therefore, there was a transfer of the business as a going concern from WSSA to the Municipality.

Accordingly, the LAC dismissed the appeal with no order as to costs.

Key takeaways

The application of section 197 is not dependant on the labels that parties give to the transactions. What is important is the role played by either employees or assets, as this is dependent on the facts of the matter. The lack of transfer of either one cannot be conclusive of whether there was a transfer as a going concern or not.