Section 197 of the Labour Relations Act, 66 of 1995 (“LRA”) provides that “if a transfer of
a business takes place, … the [new owner of the business] is automatically substituted
in the place of the [previous owner] in respect of all contracts of employment in existence
immediately before the date of transfer”.
In the context of a franchised business, this section raises some interesting questions. The
cornerstone of a franchised business is an agreement between the business owner (the
franchisee) and a franchisor.
In terms of the Consumer Protection Act, 68 of 2008 (“CPA”), the essential features of a
franchise agreement are -
“for consideration paid, or to be paid, by the franchisee to the franchisor, the franchisor grants the franchisee the right to carry on business …under a system or marketing plan substantially determined or controlled by the franchisor …”
“the operation of the business of the franchisee will be substantially or materially associated with advertising schemes or programmes or one or more trade marks, commercial symbols or logos or any similar marketing, branding, labelling or devices, or any combination of such schemes, programmes or devices, that are conducted, owned, used or licensed by the franchisor or an associate of the franchisor”; and
the agreement “governs the business relationship between the franchisor and the franchisee, including the relationship between them with respect to the goods or services to be supplied to the franchisee by or at the direction of the franchisor or an associate of the franchisor”.
As defined by the CPA, and as understood in business, a franchised business is based on
intellectual property (“advertising schemes or programmes or one or more trade marks,
commercial symbols or logos or any similar marketing, branding, labelling or devices, or any
combination of such schemes, programmes or devices”) which the franchisor permits
the franchisee to use. The intellectual property is essential to the identity of the
business and how it is operated, and much of the value of the business is based on
it. For that reason, franchisors, while allowing their franchisees to use the
intellectual property, and in fact insisting they do so, are also at pains to stress that
they, and not the franchisees, are the proprietors of the intellectual property, that
the franchisee cannot use it in any way not approved by the franchisor and, in
particular, that the franchisee cannot sell or sub-licence the intellectual property.
This is invariably emphatically recorded in the franchise agreement. If the
franchisee wishes to sell its business, the agreement makes it clear that the
franchisee can only dispose of its fixed assets; the purchaser must enter into a new
franchise agreement with the franchisor in its own right to be able to use the
intellectual property. To be allowed to use the intellectual property, the purchaser
must pay the franchisor a fee or royalty, as did the seller when it commenced its
business.
Given those circumstances, it may be argued that, when a new franchisee starts
operating a business, having acquired the equipment and taken over the premises
of a former franchisee, it did not acquire the business of the former franchisee, but
only the fixed assets of the business. That being the case, it may be argued, the
new franchisee will not be substituted for the former franchisee in terms of section
197 of the LRA, and therefore does not have to honour the employment contracts of
the former franchisee’s employees.
This was argued before the Labour Court in Motor Industry Staff Association and
another v Eastvaal Motors (Pty) Ltd [(2024) 45 ILJ 2349 (LC)], a case in which a company
(“MM”), which had been carrying on a franchised business as a dealer in motor vehicles, had
sold its assets and stock to the respondent, Eastvaal Motors (“EVM”). The intellectual property
and goodwill of MM’s business had not been transferred to EVM as it was not MM’s to sell; it
was up to the franchisors, Ford and Honda, to grant franchises to EVM to enable it to carry on
the business. MM and EVM argued further that it was not their intention to transfer the business
of MM to EVM, so section 197 did not apply and therefore, the employment of the second
applicant, an employee of MM, did not automatically transfer to EVM.
The court held that, for a transaction to fall within section 197 of the LRA, three
elements were necessary –
a transfer from one employer to another;
the transfer of whole or part of a business; and
transfer as a going concern.
In analysing the transaction, the court held that the intention of the parties was not the
determining factor as to whether a transfer of a business has occurred; the facts and
circumstances of each case must be considered. The court pointed out that several
components of the original business were transferred, including –
assets and infrastructure;
stock;
tools and equipment;
lease agreement;
customers and existing job orders.
The fact that the franchise agreements with the franchisors, Honda and Ford, could not
be, and were not, transferred, and that EVM had to enter into new franchise agreements
in its own right, was found by the court to be irrelevant. Having regard to all the
components of MM’s business that were transferred to EVM, there had been a transfer
of the business for the purpose of section 197.
What has become apparent over the years in the manner in which the Labour Court
interprets disputes relating to Section 197, is that in true Labour Court style, substance
prevails over form and uppermost for the court is job preservation. The issue of job preservation has also found favour in the Constitutional Court in the manner it has pronounced on second generation outsourcing (as a form of a Section 197 transfer).
In every case where a franchisor awards a franchise to a franchisee, the franchisee will
be required to enter into a franchise agreement with the franchisor. As a condition of the
agreement, it will be required to acquire the necessary assets to carry on the business.
The Eastvaal judgement makes it clear that the fact that the franchisee has entered into
an agreement in its own right with the franchisor does not automatically make it a “new”
business; if the incoming franchisee has acquired the assets, and taken over the
premises, from a former franchisee, it will in all probability have to take over the former
franchisee’s employees as well.
