City Power (Pty) Ltd v Grinpal Energy Management Services (Pty) Ltd and Others

City Power (Pty) Ltd is a municipal entity wholly owned by the City of Johannesburg Metropolitan Municipality, established to distribute electricity. In 2003, following a tender process for the Alexandra Renewal Project, City Power awarded a tender to Grinpal Energy Management Services (Pty) Ltd for the supply of prepaid metering systems. Service level agreements were concluded for installation and maintenance of prepaid meters. On 14 March 2012, City Power terminated the contracts alleging Grinpal had submitted a fraudulent tax certificate. After meetings and correspondence, the parties agreed in July 2012 to terminate the agreements. They agreed to a handover of infrastructure, software and databases from Grinpal to City Power, which would conduct the business in the interim until a new service provider was appointed. The handover process took place and City Power continued to run the business. City Power denied that Grinpal's 41 employees who had performed the functions were automatically transferred to City Power under section 197 of the Labour Relations Act 66 of 1995 (LRA). Grinpal brought an urgent application to the Labour Court seeking a declaration that the employees had been transferred and directing City Power to comply with section 197.

• Whether section 197 of the Labour Relations Act 66 of 1995 (automatic transfer of employees when business transfers as going concern) is applicable to municipal entities regulated by the Local Government: Municipal Systems Act 32 of 2000
• Whether section 197 of the LRA conflicts with sections 152 and 160 of the Constitution regarding municipal obligations and budgetary constraints
• Whether the Labour Relations Act prevails over the Municipal Systems Act in employment matters
• Whether there was a transfer of business as a going concern triggering section 197 of the LRA on the facts
• Whether municipal entities can be exempted from section 197 obligations due to their public functions and budgetary constraints

Condonation granted. Leave to appeal granted. Appeal dismissed save that paragraph 2 of the Labour Court order was amended to read: "The first respondent [City Power] is ordered to give effect to the provisions of section 197 of the Labour Relations Act 66 of 1995 in relation to the employees." City Power ordered to pay costs of the application for leave and the appeal, including costs of three counsel where employed.

Section 197 of the Labour Relations Act 66 of 1995, which provides for the automatic transfer of employees when a business transfers as a going concern, is applicable to municipal entities established under the Local Government: Municipal Systems Act 32 of 2000, unless specifically excluded by agreement in terms of section 197(6). The LRA prevails over the Municipal Systems Act in employment matters by virtue of section 210 of the LRA and section 52 of the Municipal Systems Act. Section 197 does not conflict with sections 152 and 160 of the Constitution regarding municipal obligations to provide services sustainably within budgetary and administrative capacity. Municipal entities cannot avoid section 197 obligations simply because they perform public functions or face budgetary constraints. Where there is a transfer of business as a going concern—determined by substance not form, considering factors such as transfer of tangible and intangible assets, whether workers are taken over, whether customers transfer, and whether the same business continues—section 197 is triggered and employment contracts automatically transfer to the new employer by operation of law. On the facts, where City Power took over Grinpal's entire prepaid electricity business including infrastructure, assets, know-how, technology and customer base, with the business continuing uninterrupted under City Power's operation, there was a transfer of business as a going concern triggering section 197.

The Court noted with some sympathy the Labour Appeal Court's anxiety about the financial implications for municipalities when section 197 applies to "second generation transfers" (where services revert to the municipality after an outsourcing contract ends), particularly given that municipalities have limited public resources and important service delivery obligations. However, the Court emphasized this does not exempt them from section 197. The Court observed that just as SASSA remained accountable for social grant payments when it outsourced that function to Cash Paymaster (per AllPay 2), municipalities remain accountable when they delegate functions to municipal entities or service providers. The Court noted that City Power, like SASSA, performs a public function and cannot divest itself of constitutional obligations by forming a municipal entity. The Court indicated that if the legislature wishes to exclude section 197 from applying to second generation transfers involving municipalities, that is a matter for legislative reform, but absent such reform, section 197 applies. The Court emphasized the availability of section 197(6) agreements as a mechanism for employers to contract out of automatic transfer obligations, though this requires written agreement with affected employees or their representatives, which City Power had not pursued.

This case is significant because it clarified that section 197 of the Labour Relations Act (automatic transfer of employees when business transfers as going concern) applies equally to municipal entities and other organs of state performing public functions, despite budgetary and procedural constraints imposed by municipal legislation. The judgment established that the LRA prevails over the Municipal Systems Act in employment matters by virtue of section 210 of the LRA and section 52 of the Municipal Systems Act. The Court rejected arguments that municipal entities should be exempt from section 197 obligations due to their public functions, constitutional obligations to provide services sustainably within budgetary constraints, or employment policies. It affirmed that government cannot avoid constitutional and labour law obligations by delegating functions to municipal entities or other service providers. The case provides important guidance on the relationship between labour legislation and municipal legislation, and reinforces employee protections in outsourcing scenarios involving public service delivery. The Court emphasized that organs of state must plan for section 197 eventualities when entering service delivery contracts, or alternatively negotiate agreements under section 197(6) to contract out of the automatic transfer provisions.