Water and Sanitation Services South Africa (Pty) Ltd v King Cetshwayo District Municipality and Others [2020] ZALCJHB 269; J 630/20 (3 September 2020)

The Labour Court of South Africa

(Held at Johannesburg)

JUDGMENT

Reportable

CASE NO: J 630/20

In the matter between:

WATER AND SANITATION SERVICES

SOUTH AFRICA (PROPRIETARY) LIMITED

Applicant

and

KING CETSHWAYO DISTRICT MUNICIPALITY

First Respondent

MUNICIPAL AND ALLIED TRADE UNION OF

SOUTH AFRICA

Second Respondent

SOUTH AFRICAN MUNICIPAL WORKERS UNION

Third Respondent

EMPLOYEES WHOSE NAMES ARE LISTED

IN ANNEXURE “A” TO THE NOTICE OF MOTION Fourth

to Six Hundred and Sixty-Sixth Respondents

UMGENI WATER

Six Hundred and Sixty Seventh Respondent

Date heard: 6 August 2020

Date of judgment: This judgment was handed down electronically by circulation to the parties’ legal representatives by email, publication on the Labour Court website and release to SAFLII. The date and time for handing down judgment is deemed to be 12h00 on 3 September 2020.

VAN NIEKERK, J

Introduction

[1] The applicant seeks a declaratory order that the termination of a service level agreement (SLA) concluded between the applicant and the first respondent (the municipality) on 12 September 2013, and extended on 31 January 2020 to 30 June 2020, constitutes a transfer in terms of section 197 of the Labour Relations Act[1] (LRA).

[2] When the matter was first called on 23 July 2020, the parties agreed to an order in terms of which Umgeni Water Board (Umgeni Water) be joined as a respondent, on the basis of an averment by the municipality in its answering affidavit that services previously provided by the applicant had been undertaken by the Board. The Umgeni Water filed an answering affidavit, and was represented at the hearing on August 2020. Also represented was the third respondent (SAMWU). SAMWU filed an answering affidavit, supporting the relief sought by the applicant. The second respondent (MATUSA), also a trade union representing the municipality’s employees, abides by the decision of the Court.

Factual background

[3] The applicant is a part of an international group that supplies water services in Africa and the Middle East, first respondent and provides what are termed bulk water services to numerous municipalities. The municipality is a local and district municipality situated in the north-eastern region of KwaZulu-Natal. As a water services authority, the municipality is responsible for providing access to basic water and sanitation within its area of supply. It is therefore responsible

for several water and wastewater treatment plants, bulk and reticulation distribution and storage systems within its area of authority.

[4] In 2003, the municipality awarded the applicant a contract for the provision of management, operation and maintenance of water and wastewater treatment facilities and associated distribution infrastructure services. That initial contract endured for the period 1 July 2003 until 30 June 2008. In 2008, the initial contract was extended to 30 June 2012 following the award of a tender. In anticipation of the termination of the second contract, the municipality invited bids to supply services for the management, operation and maintenance of water and wastewater treatment facilities and associated distribution infrastructure for the period commencing 1 July 2013 terminating on 30 June 2015. This tender was awarded to the applicant, and a new SLA was concluded. The contract was extended periodically, despite a term providing that it would terminate on 30 June 2015.

[5] In November 2019, the municipal manager advised the applicant that the agreement would expire on 31 January 2020 and not be extended. On 4 December 2019, a meeting was convened to discuss the termination of the agreement. A number of practical arrangements were discussed, one of them being a handover of services and staff matters, including the application of section 197 of the LRA. It was agreed that the SLA would be extended by a further period, possibly until 30 June 2020. On 31 January 2020, the municipality’s council resolved formally to extend the SLA until 30 June 2020. Between the period end of January and June 2020, the application or otherwise of section 197 was discussed with the municipality and with unions representing

employees. The applicant, supported by the second respondent, asserted that section 197 would apply to the termination of the service level agreement in the appointment of another service provider, or in sourcing of the services that are the subject of the

SLA. The applicant states that at the end of May 2020, it was informed that the municipality had approached Umgeni Water to run the operations after the termination of the SLA. As at 30 June 2020, the application of section 197 had not been resolved.

[6] The central operation carried out by the applicant for the municipality was the provision of water for the ratepayers and inhabitants of the municipality. The assets used for the provision of the service are owned by the municipality and monitored and maintained by the applicant. Provision of the service require the use of assets of different types, including pumps, reservoirs, pipes water treatment facilities, boreholes, chemicals to treat water to specified standards, fuel to enable the pumps to operate, vehicles are used to transport teams into the field to perform services, laboratory equipment and various other assets required to monitor and ensure water quality. In addition, the applicant operated a call centre, situated at its leased premises and developed the software to operate the call centre system for the municipality.

[7] On 30 June 2020, the applicant employed 666 employees, of whom 52 are skilled. Following the termination of the SLA, the operational services conducted by the applicant for treatment, distribution storage and wastewater treatment, maintenance services, monitoring services and general asset management remain the essential services of the municipality, that must execute its statutory mandate. The applicant contends that all of the assets required to render the agreed services have been transferred to the municipality, but for the call centre, vehicles, office equipment, computer systems and certain laboratory equipment. The municipality’s version is that after the termination of the contract between it and the applicant, the municipality took over the call centre and water tanker services only; Umgeni Water having taken over the provision of all other services. As I have indicated, Umgeni Water denies receiving transfer of any assets from the municipality.

[8] When the present application was first enrolled, the matter was postponed primarily on account of a claim of material non-joinder made by the municipality, which averred that an agreement had been concluded between it and Umgeni Water in terms of which the latter had taken over the majority of the functions previously performed by the applicant. The submission at that stage was that any transfer of the business was on the applicant’s argument a transfer to Umgeni Water and not to the municipality, and that if no contract had yet been concluded between the municipality and Umgeni Water then the relief sought directly affected the rights and obligations of Umgeni Water. The deponent to the municipality’s answering affidavit

(the municipal manager) goes so far as to say that in essence, Umgeni Water performs all of the functions for the provision of water (but for the call centre function and the water tank ring function) within the municipal boundaries ‘at this point’. The municipal manager further recorded that while the functions performed by Umgeni Water overlap with those historically performed by the applicant, many of the functions are fulfilled using Umgeni Water’s existing infrastructure which it utilizes for the provision of the same services to other parties, including other municipalities. These were averred to extend, by way of example, to laboratory testing facilities, management systems and protocols and internal engineering expertise.

[9] Consequent on the order granted on 23 July 2020, Umgeni Water filed an answering affidavit. The most significant averment for present purposes, given the municipality’s assertion that a bulk water supply contract had been concluded with Umgeni Water and that pursuant to the contract, the municipality and Umgeni Water had ‘divided the responsibilities that used to be performed by the Applicant’, is Umgeni’s assertion that it has not taken over any services related to the provision of water, and that has undertaken operations during the period 1 July 2020 to 30 September 2020 only for the purposes of determining whether to conclude a further ‘right to use’ the municipality’s infrastructure, to assess and identify employees that it may require to be transferred, to assess infrastructure conditions, of all water works and to determine whether to conclude a further and separate agreement regarding the operational control of various bulk water services. This version stands in direct conflict with the municipality’s version of events. In the absence of any clarification of the position, it would appear from the papers filed that the municipal manager that she either put up a false version to the effect that Umgeni Water had been appointed to take over the functions historically undertaken by the applicant, or she is guilty of a level of ignorance as to the terms on which water is provided to and managed within the municipality that is nothing less than astonishing.

[10] The denial of any agreement with the municipality beyond the limited three-month assessment to which Umgeni Water has agreed to undertake, Umgeni opposes the application on the basis that the applicant’s ‘overt purpose is to side-step’ the inevitable retrenchment of the applicant’s staff (at the applicant’s cost) and transfer that financial burden to either the municipality or Umgeni’. Umgeni Water further contends that the change from one service provider to another in the present circumstances is not a transfer of a going concern and that what the applicant seeks to have

transferred is a ‘bloated’ staff complement, a form of ‘staff dumping’, and prejudicial to its interests.

[11] The tender that formed the basis of the SLA dealt specifically with the municipality’s requirements concerning staffing, and imposed obligations on the applicant as a service provider. In so far as potentially affected employees are concerned, it is common cause that during the period that the SLA was in force, the applicant employed a large number of employees to assist in the rendering of services to the municipality. These include 591 operational employees (comprising unskilled employees engaged in the operational services requirement of the contract, and to a lesser extent, the monitoring services); 14 supervisors; 24 employees engaged in supervisory and support services, 27 employees engaged in maintenance teams and 10 office administrative and accounts staff.

[12] In its answering affidavit, the municipality did not dispute that in accordance with a council resolution, it had taken over or insourced the call centre function and the watering tanker function from the applicant. In respect of the former, the municipality averred that the call centre operates without the use of any technology previously used by the applicant and, as far as the deponent was aware, by way of different software and different infrastructure platform. The staff running the call centre are internal staff of the municipality who have been redeployed from other functions. Insofar as the water

tank is concerned, the municipality records that these were in any event municipal assets, even if they were used by the applicant

during the operation of the SLA, and that they are currently being driven and operated by municipal employees. In both cases, the

municipality acknowledges that it is performing the same function as originally provided by the applicant in terms of the SLA, but denies that there has been any takeover of any business. In so far as remaining functions are concerned, the municipality avers that Umgeni Water performs all remaining functions for the provision of water within its boundaries. This is patently inconsistent with Umgeni Water’s evidence and also contrary to the terms of the draft contract that sets out the putative terms of the relationship between the municipality and Umgeni Water and on which the municipality relies. It is also inconsistent with the tender issued by the municipality for the appointment of a service provider for the operation of the rudimentary schemes which supply water to rural areas within the municipality, for a period of three years ending June 2023. The closing date for the tender is 29 July 2020.

Applicable legal principles

[13] Section 197(1) provides:

“(1) In this section and in section 197A –

(a) ‘business’ includes the whole or part of any business, trade, undertaking or service; and

(b) ‘transfer’ means the transfer of a business by one employer (“the old employer”) to another employer (“the new employer”) as a going concern.

(2) If a transfer of a business takes place, unless otherwise agreed in terms of sub-section (6) –

(a) 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;

(b) all the rights and obligations between the old employer and an employee at the time of transfer continue in force as if there had been rights and obligations between the new employer and the employee;

(c) 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 the new employer; and

(d) the transfer does not interrupt and employee’s continuity of employment, and an employee’s contract of employment continues with the new employer as if with the old employer.”

[14] The application of section 197 has been the subject of a number of judgments by the Constitutional Court, most recently in Road Traffic Management Corporation v Tasima (Pty) Ltd; Tasima (Pty) Ltd v Road Traffic Management Corporation,[2] a judgment delivered two days prior to the hearing of the present application. That judgment affirms the fundamental purpose underlying

section 197 – the variation of the common law consequence of the transfer of a business as a going concern to preserve security of employment and to facilitate the transfer of businesses. Once a transfer of the kind identified by section 197(1) occurs, all

contracts of employment that existed immediately before the transfer took place are automatically transferred to the transferor (the ‘new employer’), by operation of law, together with the business. The transferee replaces the transferor as the employer party in terms of the contracts of employment and assumes all obligations of the previous employer. The new employer also acquires the contractual rights of the previous employer.

[15] It is apparent from the above that for section 197 to apply, there are three conditions, all of which must be met simultaneously. These are:

a. a transfer;

b. of a business (the transfer must be of the whole or part of a business);

c. as a going concern.

[16] The label that parties attach to their transaction under scrutiny is not relevant. As Jafta J stated in Aviation Union of South Africa and Another v South African Airways (Pty) Ltd and Others:[3]

It must be stressed that the event which brings section 197 into play is the transfer of business as a going concern. The question whether the section applies to a particular case cannot be determined, as the Supreme Court of Appeal did, with reference to the label of the transaction effecting transfer. The section does not cite transactions to which it applies. Nor does it refer to any labels. Instead, its application must always be determined with reference to three requisites, namely, business, transfer and going concern.

[17] Each of the three requirements that in combination, trigger the application of section 197 have been interpreted by the South African courts, by and large, using the language of the European Court of Justice in the application of the Business Transfers Directive applicable in the European Union. That court has held, in summary, that a transfer must relate to an economic entity (defined to mean an organised grouping of persons and assets facilitating the exercise of an economic activity that pursues a specific objective), and a determination of whether that entity retains its identity after the transfer.

[18] Outsourcing agreements, in principle at least, meet these criteria least where the agreement is one of an initial outsourcing from a client to a service provider (a ‘first generation’ transfer). The meaning of a ‘transfer’ in the context of the outsourcing of services was discussed in the Aviation Union judgment by Jafta J, who said the following:

[47] But whether a transfer as contemplated in s 197 has occurred or will occur is a factual question. It must be determined with reference to the objective facts of each case. Speaking generally, a termination of a service contract and a subsequent award of it to a third party does not, in itself, constitute a transfer as envisaged in the section. In those circumstances, the service provider whose contract has been terminated loses the contract but retains its business. The service provider would be free to offer the same service to other clients with its workforce still intact.

[48] For a transfer to be established there must be components of the

original business which are passed on to the third part….’

[19] In other words, when services are involved, what must be transferred is the business that supplies services. The mere termination of a service contract would not, without more, constitute a transfer as a going concern for the purposes of section 197. There must be further indicators, such as whether assets, employees or customers were taken over by the transferee employer.[4]

[20] In relation to the requirement that a business be transferred as a going concern, in Aviation Union, the court emphasized that what matters during the factual enquiry is its substance rather than its form, Jafta J stated:[5]

Although the definition of business in section 197(1) includes a service, it must be emphasized that what is capable of being transferred is the business that supplies the service and not the service itself. Were it to be otherwise, a termination of a service contract by one party and its subsequent appointment of another service provider would constitute a transfer within the contemplation of the section. That this is not what the section was designed to achieve is apparent from its scheme, historical context and its purpose. The context referred to here is the alteration of the common law consequences on employment contracts, when the ownership of a business changes hands.

[21] This is consistent with the often quoted statement by the European Court of Justice in Spijkers v Gebroeders Benedik Abattoir v Alfred Bendik en Zonen BV [6] that ‘an entity cannot be reduced to the activity entrusted to it’ (See also Süzen v Zehnacker Gebaudereinigung GmBH Krankenhausservice)[7]. The point is reinforced in paragraph [74] of the Aviation Union judgment in relation to the ‘going concern’ requirement:

The phrase ‘going concern’ has been construed to include not only that the business has changed hands but that it is exactly the same business that continues to operate. We are told that to determine this fact one must look at various factors, none of which is decisive. These factors include whether or not the same business is being carried on by the party who received it. Therefore, proof of the fact that performance of the same service was to continue, albeit under different hands, does not establish a transfer as a going concern. Something more is required.

[22] It is clear from the above principles that transactions that potentially attract the application of section 197 include outsourcing transactions[8]; what has been referred to as ‘second generation’ outsourcing (the replacement of one service provider with another)[9] and insourcing, where a service previously outsourced to a service provider is again undertaken by the outsourcing party.[10]

[23] In Road Traffic Management Corporation v Tasima (Pty) Ltd; Tasima (Pty) Ltd v Road Traffic Management corporation, a judgment delivered by the Constitutional Court days before the hearing of the present application, the court confirmed that the application or otherwise of section 197 was in essence a factual enquiry, but that the facts should not be tested against section 197 before the legal causa of a transfer is examined.[11] The court referred to Rural Maintenance Pty) Ltd v Maluti-A-Phofung Local Municipality[12] where Froneman J said the following:[13]

It is settled that the enquiry to determine whether the business is transferred as a going concern is a factual one. But the parameters of the factual enquiry determined by the legal calls from which the transfer schemes. The legal because maybe the invalidity of the underlying contract. In this case, if the EMC is held to be invalid, the legal cause of restitution demands that what Rural needs to hand back to the municipality is the original business is operated by the municipality at the time when it was transferred to Rural. If, however, it is held that the EMC was valid, the legal calls within which the factual enquiry (with the transfer of the business took place) must take place as the valid contract. What Rural needs to hand back is the business it operated until acceptance of the repudiation of the EMC and the cancellation of the EMC.

[24] Road Traffic Corporation concerned a dispute about the application of section 197 in circumstances where the transfer was held to have taken place consequent on an order of court, where an extension to a service agreement was declared invalid and the transfer of the service from the erstwhile service provider to the ‘client’ entity was ordered. The causa of the transfer thus assumed some significance, particularly in that the client party contended that the legal cause of the transfer was the original service agreement between the parties. In the present instance, the causa is not controversial – it is the termination, by the effluxion of time, of the service agreement concluded between the municipality and the applicant. What gives rise to a section 197, submits the applicant, is the termination of the contract and the assumption by the municipality of the services previously provided in terms of the SLA.

Analysis

[25] At the hearing of the application, counsel for the municipality abandoned the submission that section 197 does not apply in a ‘public tendering environment’ and more specifically, in circumstances where a service rendered to a municipality under contract has been terminated. Road Traffic makes clear that the character of the entity receiving the business as a going concern is not relevant – the only qualification is that it must be capable of being an employer[14]. Further, ‘the nature of what is transferred from one entity to another for the purposes of section 197 does not change character

depending on the identity of the recipient’. The judgment also makes clear that the Public Finance Management Act[15] (PFMA) contains no exemption from the LRA, and the LRA does not differentiate between the state and it organs as employer, and any other employer (see paragraph 89 to 92 of the judgment).[16] In the present instance, the fact that the municipality is a statutory body performing a public function is of no consequence; the application of section 197 must be determined by reference to its jurisdictional requirements.

[26] Also of no consequence is the submission made on behalf of Umgeni Water to the effect that the application is no more than an attempt by the applicant to rid itself of a ‘bloated’ workforce at the expense of the municipality and/or Umgeni Water. Section 197 operates as a matter of law; it is not dependent of the motive or intent of the transferor employer, nor is its application to be determined by the employment-related consequences for the transferor or any prejudice that the transferor may suffer on account of the transfer. In this regard, Umgeni Water’s response to this application is misguided.

[27] Be that as it may, and as entirely at odds with the municipality’s version that Umgeni Water’s averments may be, I must accept that Umgeni Water has only an interim arrangement with the municipality to implement a phased approach of any takeover of operational control of various water bulk services that remains suspended pending an assessment of the municipality’s infrastructure and that it has not been appointed, at this stage at least, to supply the municipality with bulk services. In these circumstances, there can be no transfer of any business as a going concern from the applicant to Umgeni Water. Of course, should Umgeni Water be appointed in due course to render all or some of the services, whether section 197 is triggered would depend on the terms of any agreement between the municipality and Umgeni Water and the nature and extent of any transfer as any business as between them. But for present purposes, what remains to be determined is whether the termination of the SLA gives rise to the application of section 197 as between the applicant and the municipality. The central enquiry is therefore what components of the applicant’s business were retained or were taken over by the municipality after 30 June 2020. Put another way, the central question is what components of the applicant’s services which make up its business, or a part of its business, continue to be used by the municipality. Allied to this is the question of how significant or important these components are to the operation. What this necessitates is an examination of the nature and extent of the service conducted by the municipality after the termination of the SLA in order to establish first, whether it is a business or a service which is being transferred, and if so, whether it is a business as a going concern.

[28] It is not in dispute that from 2003 until 30 June 2020, the applicant provided the municipality with management, operation and maintenance of water and wastewater treatment facilities, and the associated distribution infrastructure services. In terms of the SLA, the applicant was appointed to perform the operation, maintenance and monitoring of certain water and wastewater treatment plants, bulk and reticulation distribution infrastructure and storage reservoirs. These agreed services fell into four broad categories – operational services, maintenance services, monitoring services and general asset management. In respect of the latter, ownership of all the assets remained vested in the municipality and, on termination of the SLA, the applicant was obliged to return the assets to the municipality in the condition they were installed, or managed in accordance with good industry practice. From 2013, the applicant also managed water services call centre on the principality’s behalf.

[29] It is also not disputed that in the provision of the agreed services, the applicant utilised a large number of assets owned by the municipality. These included boreholes, water treatment facilities, pumps and pipes which transported water retained in reservoirs. In addition, the applicant utilised its own or leased tools, facilities and equipment such as vehicles to transport teams into the field to perform services, office space, workshop facilities, laboratory equipment to monitor and ensure water quality, computers and office equipment to manage the logistics concerned with the operation and maintenance services. In respect of the call centre, the applicant utilised its own equipment and telecommunication system and develop software to operate the call centre. The applicant also provided consumables such as chemicals with which to treat water to specified standards, and fuel for the operation of pumps.

[30] Insofar as transfer of employment is concerned, the tender awarded to the applicant anticipated that there may be a new replacement contract appointed and provided that employees who elect to be transferred to the incoming contractor will be transferred as part of a going concern with adherence to the key Labour principles. Further, the conditions of employment of transferred employees covered by collective agreement would be retained, otherwise the new employer was free to offer other terms and conditions to transferred employees on terms equal to or better than those enjoyed by the employees in terms of their employment with the applicant.

[31] It is the function of a district municipality to supply bulk water, bulk electricity bulk sewage purification works and main sewage disposal (see section 84 (1) of the Local Government: Municipal Structures Act 117 of 1998). The central operation carried on by the applicant for the municipality is the provision of water for the ratepayers and inhabitants of the municipality. The water is obtained through boreholes and pumps, and transported using pipes for retention in reservoirs. The quality of the water must be monitored and corrected whenever necessary. The assets used for these purposes must be monitored and maintained. All of this work as performed by the applicant in terms of the SLA. It follows that whoever takes over this function (either the municipality itself or a different service provider), must perform the same work, using the same assets. There are also assets of different types, including chemicals supplied to treat water to specified standards, and feed used to operate the

pumps. The vehicles which transport teams of employees into the field to perform services. There is also laboratory equipment and various other assets which are used to monitor and ensure water quality, and computers and office equipment as well as a call centre. Not all of these assets were transferred back to the municipality to provide a similar service. In particular, the vehicles, computer systems, office equipment and certain laboratory equipment used by the applicant were not retained, but on the municipality’s version, control of the pumps, reservoirs, pipes and other fixed equipment reverted to the municipality.

[32] While the over 500 employees engaged by the applicant is not an insubstantial number, they do not comprise the main essential feature of the applicant’s business or service. The present case can be distinguished from UNISA[17], where the service was in essence one for the provision of labour. The main service here is the provision of water to the municipality. The boreholes, storage and infrastructure are essential to water delivery. The service cannot occur without those assets which will remain and be used by the municipality or any incoming service provider other than the applicant. In short, the failure to retain the applicant’s employees is not in itself determinative of whether there is a transfer in terms of section 197.

[33] Counsel for the municipality recalled the finding in Aviation Union that for section 197 to apply, what must be transferred is not the service provided by any service provider, but the business that provides that service. Counsel submitted that in the present instance, there is no clear, discrete business being taken over, nor were any assets of significance being transferred. In this regard, he sought to distinguish Aviation Union, Tasima and City Power, all of which contemplated the transfer of assets. But the constitutional court has emphasised that for a transfer of a business

as a going concern to occur, not all the assets of the business have to be transferred and that ‘it depends on the nature of the business and essentiality or otherwise of particular assets for a particular business’.[18] On the facts of City Power, the court found that the assets that the service provider did not transfer back to the municipality on termination of the service level agreement were essential to the profitability and operation of the business and that without these crucial assets, the municipality

could not have carried on the business without any major difficulties.

[34] The transfer of assets presents particular difficulty in cases that concern a change in service provider or such as in the present instance, the resumption by a client of services initially the subject of outsourcing. It is clear that not all the assets of a transferring business need to be transferred to trigger section 197,[19] but it may be significant if all of the assets transferred initially from the client to the service provider were returned to the client in conclusion of the outsourcing arrangement.[20] Harsco and Unitrans Supply Chain Solutions (Pty) Ltd and Another v Nampak Glass (Pty) Ltd and Others;[21] TMS Group Industrial Services (Pty) Ltd t/a Vericon v Unitrans Supply Chain Solutions (Pty) Ltd and Others[22] emphasise the assumption of the right to use assets and infrastructure in order to continue to provide the same service. In TMS, the LAC agreed with the Labour Court’s finding that on the evidence, the assumption of the incoming contractor’s right of use of the client’s infrastructural assets in circumstances where it would provide the same services from the same premises

without interruption, constituted a transfer as a going concern for the purposes of section 197. In that instance, the facilities were handed over to the incoming contractor in a state in which it was able to carry on the very same activity which had previously been conducted by the outgoing contractor.

[35] In the present instance, the assets required to provide the service; indeed, which are essential to the provision of the service, have been retained by the municipality. The case is therefore unlike that in City Power, where an entity wholly owned by a municipality terminated the contract of a service provider contracted to provide, install and maintain prepaid electricity metering systems. The Constitutional Court held that the entity’s taking back the business ‘as is’ with the network infrastructure, know-how and technology required to operate the system, with the clear intention of maintaining the supply of electricity, triggered the application of section 197. In the present instance, the consequence of the cancellation of the SLA is that the municipality became obliged itself to deliver water-related services to its inhabitants, and the applicant was obliged to return to the municipality the infrastructure and other equipment necessary for the provision of that service. The retention, use and operation of the municipal assets is of such a significant degree that it should be said that the business operated by the applicant was transferred to the municipality when the SLA terminated.

[36] On the facts, it does not assist the municipality to submit, as it does, that because the elements of the physical infrastructure for water delivery services were and remained assets of the municipality throughout the period of the SLA and remain assets of the municipality on termination of the SLA and the appointment of any alternative contractor, section 197 does not apply. What is of particular relevance is the assumption of the right of use of the municipality’s infrastructural assets and water tankers by the municipality itself, or an alternative contractor in circumstances where it will provide the same service to municipal customers without interruption. On the municipality’s own version, it is clear that the facilities are to be reclaimed or handed over at some future date to an alternative service provider in a state in which the municipality or the service provider can carry on the very same activities which had previously been conducted by the applicant. In the absence of any disclosure by the municipality of the functions previously undertaken by the applicant having been taken over by another service provider, and if Umgeni Water, as it credibly asserts, has not taken over these functions, the only reasonable conclusion is that on the date of termination of the SLA there was a transfer not only of the use of assets, but also infrastructure, activities, premises and operating methods, back to the municipality. For the duration of the SLA, the applicant provided the municipality with management, operation and maintenance of water and wastewater treatment facilities, and the associated distribution infrastructure

services. For the present at least, these remain with the municipality. It would appear from the papers that the municipality has been able to continue to provide these services seamlessly after the termination of the SLA. This supports the overall assessment that the business conducted by the applicant had been transferred to the municipality with effect from 1 July 2020.

[37] Insofar as the call centre is concerned, absent any substantive details on how the municipality implements the service and how this differs from the service methodology of the applicant to the extent that the right to provide services now based on the municipality, the same assets in the form of infrastructure and software are used to provide the services and the activities conducted a substantially the same as those performed by the applicant. The portion of the business relating to the call centre previously performed by the applicant has been transferred as a going concern to the municipality.

[38] Of some significance in determining the application otherwise of section 197 are the provisions of the SLA dealing with the putative transfer of staff where a new service provider is appointed. The parties clearly recognised under that contract that they would be a transfer as a going concern, and that they would be a need to protect the job security of employees already engaged.

[39] In summary, on a conspectus of all the relevant facts, the municipality outsourced the management, operation and maintenance of water and wastewater treatment facilities and associated distribution infrastructure services to the applicant. The operation in which the applicant engaged was an economic entity (or business as a going concern) and not merely a service. The initial outsourcing from the municipality to the applicant was a transfer as envisaged by section 197. On termination of the SLA, the essential components of the business were transferred back to the municipality. The nature of the service (i.e. the supply of water) remains unchanged, the extent of the service remains unchanged, those assets necessary for the service to be performed, particularly in the form insofar as boreholes, water treatment facilities, pumps and pipes, reservoirs and other fixed

equipment, all assets that the municipality made available to the applicant to use during the life of the SLA, have been returned to the municipality which utilises those assets to continue to provide water services to those who live within its boundaries. In these circumstances, the termination of the SLA did not amount simply to a termination of a contract to provide services to the municipality. What was taken back by the municipality is the business that supplies the service, and that the municipality and at some future date, an alternative service provider will continue to seamlessly provide the services previously rendered by the applicant with the use of all of the municipality’s assets and infrastructure being taken over from the applicant. All are indicative of the transfer of business as a going concern for the purposes of section 197.

[40] In so far as costs are concerned, the Court has a broad discretion in terms of section 162 of the LRA to make orders for costs according to the requirements of the law and fairness. The applicant attempted for some months to engage with the municipality on the issue of the transfer of employees, culminating in a proposal to participate in the mediation process. The applicant’s endeavours to mitigate against the need to resort to litigation were met with inaction by the municipality at every turn. Further, the applicant’s attempts at participation in a hand over of services to another service provider or to the municipality itself has been met with deliberate exclusion in circumstances where engagement may have served to remove anxiety and uncertainty about the continued security of employment of several hundred employees. This is not an attitude that served to promote sound labour relations. In so far as the joinder of Umgeni Water is concerned, this came at the insistence of the municipality. No criticism can be laid at the applicant for the non-joinder of Umgeni Water, since it is the municipality that failed after enquiry prior to and during May 2020 to disclose the entity it intended to appoint as a new service provider, and then averred in the answering affidavit that it was Umgeni Water in circumstances where this was patently not true. In these circumstances, the municipality should be responsible for the costs, including the costs occasioned by the postponement on 23 July 2020. The matter is of sufficient complexity to warrant the costs of two counsel where employed. Further, the applicant should not be held liable for Umgeni Water’s costs; the interests of the law and fairness are best served by Umgeni Water bearing its own costs. The same considerations apply to SAMWU.

[41] I make the following order:

Order

1. It is declared that the termination of the service level agreement entered into between the applicant and the first respondent on 12 September 2013 and terminated under a resolution of the first respondent’s council on 31 January 2020 with effect from 30 June 2020, constitutes a transfer of the whole or part of a business from the applicant to the first respondent for the purposes

of section 197 of the Labour Relations Act, 66 of 1995.

2. It is declared that the contracts of employment of the employees listed in annexure A to the notice of motion were transferred to the first respondent in terms of section 197 (2) with effect from 1 July 2020, and all rights and obligations between the applicant and the employees continue in force as if they had been rights and obligations between the first respondent and such employees.

3. The first respondent is to pay the applicant’s costs, including the costs occasioned by the postponement on 23 July 2020, and the costs attendant upon the employment of two counsel.

André van Niekerk

Judge of the Labour Court of South Africa

Representation:

For the applicant:

Adv.

Redding SC with Adv. Pranisha Maharaj-Pillay

Instructed by:

Glyn Marais Incorporated

For the first respondent: Adv.

P.J Wallis with Adv. S.B.R Lushaba

Instructed by:

Strauss Daly Incorporated

For the third respondent: Adv. SK Xulu

Instructed by:

M Dlamini Attorneys

For the six hundred

and sixty-seventh respondent: Adv TG Madonsela SC, with Adv. TR Palmer and Adv

ES Cele

Instructed by: Hlela

Attorneys

[1] Act 66 of 1995 as amended.

[2] [2020] ZACC 21 (4 August 2020).

[3] 2012 (1) SA 321 (CC), at paragraph [44], referred to as Aviation Union.

[4] At paragraphs 30 and 31.

[5] At paragraph [52] of the judgment.

[6] BV [1986] 2 CMLR 296 (ECJ).

[7] [1997] IRLR 255 (ECJ)

[8] See, for example, SAMWU and others v Rand Airport Management Company (Pty) Ltd and others (2005) 26 ILJ 67 (LAC); Franmann Services (Pty) Ltd v Simba (Pty) Ltd and Another (2013) 34 ILJ 897 (LC).

[9] See Aviation Union.

[10] See, for example, Imvula Quality Protection (Pty) Ltd v UNISA (2019) 40 ILJ 104 (LAC).

[11] (see paragraph 36 of the judgment).

[12] (2017) 38 ILJ 295 (CC),

[13] At paragraph 39:

[14] See paragraph 82 of the judgment.

[15] Act 1 of 1999.

[16] In any event, it was never the case that municipalities and other organs of state were exempt from the application of section 197 - see Aviation Union, City Power v Grinpal Management Services (Pty) Ltd and Others (2015) 36 ILJ 1423 (CC) and Rural Maintenance.

[17] Supra n 10.

[18] At paragraph 37.

[19] See Aviation Union at paragraph 37 and 115

[20] See City Power at paragraph 115.

[21] (2014) 35 ILJ 2888 (LC), at paragraph 32

[22] (2015) 36 ILJ 197 (LAC).