The Application of Section 197 of the Labour Relations Act to Second-generation Outsourcing

• Jurisdiction: South Africa
• Author: Bongani B. Khumalo
• DOI: 10.25159/2522-6800/5038
• Published date: 03 December 2019
• Date: 03 December 2019
• Pages: 1-19
• Published By: UNISA Press

Article

Southern African Public Law

https://doi.org/10.25159/2522-6800/5038

https://upjournals.co.za/index.php/SAPL

ISSN 2522-6800 (Online)

Volume 34 | Number 2 | 2019 | #5038 | 19 pages

© Unisa Press 2019

The Application of Section 197 of the Labour Relations

Act to Second-generation Outsourcing

Bongani B Khumalo

https://orcid.org/0000-0003-3942-3281

Lecturer in the Department of Mercantile Law

College of Law, University of South Africa

mavimbb@unisa.ac.za

Abstract

Section 197 of the Labour Relations Act 66 of 1995 provides that where an

employer transfers the whole or part of a business, trade, undertaking or service

to another employer as a going concern, the contract of employment and other

obligations are transferred to the new employer. This means that the new

employer is substituted for the old employer. In the light of pertinent case law

in this regard, it is generally accepted that section 197 also applies to first-

generation outsourcing of work. In this case, the employees performing the

work or service being outsourced are absorbed by the contracted party, now the

new employer. However, uncertainty still prevails as to whether the application

of this provision may be extended to a secondary contractor who takes over the

outsourced work after the expiry or termination of the first contactor’s contract.

The question persists whether or not a section 197 transfer occurs when a new

contractor is appointed (second-generation outsourcing). If it does apply, how

is the longevity of such an application to be determined? With the aid of case

law, this article seeks to investigate these questions and the potential imbalance

created by the way in which the courts have interpreted the application of this

section.

Keywords: section 197 of the LRA; outsourcing; second-generation outsourcing;

transfer of business; protection of employees; contract of employment

2

Introduction

Outsourcing is a commercial practice that has been used by many employers in both the

private and the public sector. A survey conducted by Norton Rose in 2011 revealed that

most businesses that engage in outsourcing cite cost reduction as the most important

driver.

1

Other commercial and legal considerations include the reduction of overhead

expenses, more especially in the equipment- and technology-dependent services.

2

Outsourcing gives businesses the ability to focus on core business activities and income

generation and to allow ancillary functions to be performed by external providers.

3

Another reason cited in favour of outsourcing has to do with quality assurance of the

product or service that the business renders, especially if the business does not have the

requisite expertise internally.

4

Another survey conducted by KPMG in 2012 showed that outsourcing is on the rise in

the South African labour market.

5

These market trends and the importance of job

security for employees employed by external service providers highlight the importance

of provisions such as those in section 197 of the Labour Relations Act 66 of 1995 (LRA)

and their application to outsourcing transactions. As much as outsourcing transactions

may make perfect business sense, they inevitably have a negative impact on the lives of

workers.

6

It could be reasonably argued that workers find themselves in an undesirable

position when they are rendered redundant to the needs of their employer as a result of

a decision to outsource. This is occasioned by a possible reduction in wages and social

security benefits or coverage. It is notable that most South African institutions of higher

learning are not spared of this practice, as was evident in the 2016 insourcing protests

1

Norton Rose, ‘Outsourcing in a Brave New World: An International Survey of Current Outsourcing

Practice and Trends’ Report (2011) 5 <http://ict-industry-reports.com.au/wp-

content/uploads/sites/4/2013/05/2012-Outsourcing-In-A-Brave-New-World-Norton-Rose-June-

2012.pdf> accessed 8 May 2018.

2

Bin Jiang and Amer Qureshi, ‘Research on Outsourcing Results: Current Literature and Future

Opportunities’ (2006) 44 Management Decision 49.

3

Darshana Sedera and others, ‘The Future of Outsourcing in yhe Asia-Pacific Region: Implications for

Research and Practice – Panel Report from PACIS 2014’ (2014) 35 Communications o f the

Association for Information Systems 318.

4

ibid.

5

Edward Webster and Rahmat Omar, ‘Work Restructuring in Post-apartheid South Africa’ (2003) 30

Work an d Occupations 210. See KPMG, ‘2012 South African Sourcing Pulse Survey (1st & 2nd

Quarter)’ (2012) <https://home.kpmg.com/za/en/home/insights/2013/08/sourcing-pulse-survey-1st-

2nd-quarter-2012.html> accessed 8 May 2018. See also MyBroadBand Staff, ‘KPMG Launches First-

ever South African 2012 P ulse Survey for Shared Services an d Outsourcing’ (19 September 2012)

<https://companies.mybroadband.co.za/blog/2012/09/19/kpmg-launches-first-ever-south-african-

2012-pulse-survey-for-shared-services-and-outsourcing/> accessed 8 May 2018.

6

Webster and Omar (n 5) 198, indicate that more than 20 000 people, mostly black, lost their jobs

between 1997 and 2000 as a result of outsourcing, among other reasons.