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South Africa: The applicability of s 197 of the LRA in the context of expiring (non-exclusive) service agreements

26 June 2023
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Overview

  • Where a business outsources services to an external service provider, it is common for the parties to regulate the termination of the relationship and ‘exit plan’ in the agreement. These provisions often contemplate the application of section 197 of the South African Labour Relations Act, 1995.
  • In the recent matter of Mobile Telephone Networks (Pty) Ltd and Others v CCI SA (Umhlanga) (Pty) Ltd and Others, the Labour Appeal Court reiterated that the expiry of a service agreement will not always trigger section 197.
  • The Court also found that, in circumstances where more than one service provider is contracted to provide the same services to the business at the time of termination, the factor of non-exclusivity will be a weighty consideration in determining whether or not there has been a transfer of a business as a going concern.

In the recent matter of Mobile Telephone Networks (Pty) Ltd and Others v CCI SA (Umhlanga) (Pty) Ltd and Others, the Labour Appeal Court (LAC) found that section 197 of the Labour Relations Act, 1995 (LRA) did not apply to the lapsing of the services agreement between MTN and CCI SA (Umhlanga) (CCI) in circumstances where two other existing service providers continued to provide call centre services to MTN.

The facts

An important aspect of MTN’s business is continual interaction with its customers. To cope with customer inquiries, a large workforce of people who have the necessary product knowledge and communication skills, is needed. While MTN previously carried on this service internally, in 2006 it began outsourcing its customer call centre work.

CCI, which was already in the business of providing call centre services, was contracted to perform this service for MTN. The contract was for a fixed term of five years and, after an initial year of exclusivity, MTN was entitled to contract other service providers to provide the same call centre services as CCI. This it did. The ‘work pie’ comprising the customer calls was therefore shared among three service providers (CCI, Ibridge and Ison). This workload was distributed by way of a randomised computer program that sent a caller to one of the outsourced call centres.

CCI needed to make additional arrangements to accommodate the contract with MTN including establishing a discrete unit to deal with MTN work and setting up a ‘Chinese Wall’ (the unit which did MTN work was required to be physically segregated from other staff and was located in CCI’s Umhlanga and Sandton offices).

CCI was responsible for hiring sufficient employees (the ‘consultants’) to fulfil the contractual needs of MTN, and as call volumes fluctuated, CCI would need to either increase its staff complement, or reduce it by retrenching or redeploying employees as they deemed fit. CCI was also required to provide its staff in the MTN unit with training on particular MTN product knowledge, over and above general call centre techniques.

Clause 46 of the services agreement between MTN and CCI described in detail the duties of both parties upon the termination of the fixed-term contract. This involved an exit plan to ensure no disruption of the service to MTN when a transition to a ‘replacement’ service provider eventuated.

When CCI’s contract expired, its access to MTN systems was revoked and historical call logs were sent to MTN. MTN had no use for this, and it simply went into storage. Neither Ibridge nor Ison required any transfer of equipment or other assets to perform their contractual functions, which they had already been carrying out before the termination of the CCI contract.

The calls that would ordinarily have been redirected to CCI were simply redirected to the two other call centre providers, which had to increase their staff complement to accommodate the additional call volumes. 45 CCI staff resigned to join Ibridge in Kwa-Zulu Natal. Ison, which services MTN from the Cape, recruited an additional 270 staff members.

The test for whether there has been a transfer of a business as a going concern

The LAC reiterated the test for whether there has been a transfer of a business as a going concern for purposes of section 197:

  • is there a discrete business unit in the hands of the former owner;
  • which is, as a fact, transferred from one owner to another;
  • which business is a going concern at the time of the transfer; and
  • which is recognisable as that going concern in the hands of the subsequent owner.

Analysis

On the facts, the Court found that there was clearly a discernible business capable of being transferred. However, the Court found that this business was not transferred simply by the lapsing of the contract. The major asset creating the discernible unit was the contractual entitlement to perform call centre services in such volumes as prescribed by MTN. This did not transfer to Ibridge or Ison (they already had existing entitlements).

The secondary assets comprising the tools of the trade, i.e. offices, furniture, telephones etc. also did not transfer. The ‘keys’ to access the MTN database simply went into MTN’s storage. The fluctuating body of employees who performed the service may be construed as the third category of assets, but they came and went in variable numbers and no significant number of workers took up employment with Ibridge or Ison. The fact that Ison in the Cape could not, practically, take over people who worked for CCI in Umhlanga, was material, and showed that a labour-intensive business has a domicile. A transfer is accordingly, in some circumstances, simply not feasible.

The sum effect of the termination of the CCI contract was that Ibridge and Ison got a greater volume of work. They performed it without any need to take transfer of anything and no ‘components’ of CCI’s business were discernible in the hands of either service provider. There was accordingly no transfer of a business as a going concern.

The Court rejected CCI’s argument that section 197 was built into any termination of the contract with MTN. The Court held that the circumstances that governed the particular termination would determine whether or not section 197 was triggered. Had CCI been an exclusive supplier of call centre services to MTN, a replacement service provider would have been needed to be engaged upon termination of the contract (as recognised in the service agreement). However, on these facts, once the contract lapsed, the ‘MTN business unit’ of CCI became redundant.

Key takeaways

It is not the case that whenever a business outsources a discreet business unit, any termination of that relationship triggers section 197. One needs to analyse the circumstances of that particular termination. Where, at the time of termination, there is more than one service provider already providing the same services, then this non-exclusivity will be an important factor to consider in determining whether a business has actually transferred.