Information technology outsourcing and the application of Section 197 of the Labour Relations Act

8 August 2023
by Isaivan Naidoo, Jan Norval and Naledi Ramoabi

Over the years, outsourcing of information technology services has become standard practice for most large scale companies. Outsourcing involves a service provider’s employees performing tasks or services for the hiring company. Due to the nature of outsourcing arrangements, the employees involved are integral to the delivery of the services, which can sometimes blur the lines regarding who their employer is. In South Africa, employment relationships are governed under the Labour Relations Act, 1995 (“LRA”), amongst other pieces of legislation. Section 197 of the LRA states that if there is a transfer of a business as a going concern, the contracts of employment between the transferor employer (“old employer”) and its employees are automatically transferred to the transferee employer on the same terms and condition of employment that employees enjoyed with the old employer (“new employer”).

As such, section 197 of the LRA has an impact on outsourcing arrangements that companies should take heed of when considering outsourcing any of their IT services or functions.

What is IT outsourcing?

IT outsourcing is the use of third party service providers to effectively deliver IT services and solutions that are required in a company’s business. Outsourcing in the IT industry has become popular due to benefits that businesses can gain when using this model. The advantages of outsourcing include:

  • reducing costs by contracting for services based on a fixed budget;
  • accelerating time to market by having dedicated teams responsible for IT projects;
  • access to external experts who have specialised skills and knowledge; and
  • being able to focus on the entity’s core business whilst still having IT services delivered to the organisation.

When is section 197 of the LRA triggered in outsourcing arrangements?

Whether section 197 of the LRA is triggered is a purely factual question. If the factual requirements mentioned in section 197 exist, then section 197 will be triggered, resulting in contracts transferring from the old employer to the new employer, by operation of law. For section 197 to apply, there are three conditions that have to be met simultaneously:

  • there has to be a transfer;
  • the transfer must be in respect of a business (whether the whole or part of a business is being transferred); and
  • the business must be transferred as a going concern;

The transfer must relate to an economic entity, generally defined as an organised grouping of persons and/or 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.

This means that a distinct group of persons providing an IT service could be transferred through section 197 at the beginning of an outsourcing contract, or when there is a change in IT service providers, or if the IT service is insourced. Also, should assets transfer as part of the insourcing or outsourcing, section 197 may also be triggered.

How to manage a section 197 trigger

Depending on the services and solutions being offered, a customer will have to consider whether the outsourcing arrangement triggers section 197 of the LRA. Nonetheless, customers must ensure that the outsourcing transaction does not inadvertently trigger the application of section 197. Customers can address this by:

  • ensuring that the transaction is structured in such a manner that an economic entity does not transfer or does not retain its identity after the transfer, if possible;
  • entering into agreements where affected employees, the new employer and the old employer, agree that section 197 will not apply;
  • choosing a service provider that has the necessary skill and expertise to deliver the solution or service in order to avoid a transfer;
  • understanding the business model that the service provider uses for delivering the services to determine the probabilities of triggering section 197; and
  • negotiating and concluding sound IT agreements with service providers that ensure that there are adequate contractual provisions that deal with section 197.

Employment patterns within the technology industry have changed, and these can often raise complex legal issues if a company has not taken the time to consider the consequences of outsourcing work. In some transactions, section 197 may be inadvertently triggered, and it is therefore important for companies to seek sound legal advice before entering into outsourcing arrangements with third parties.

Isaivan Naidoo
Executive | Technology, Media and Telecommunications

Jan Norval
Executive | Employment

Naledi Ramoabi
Candidate Legal Practitioner | Technology, Media and Telecommunications