South Africa: Beware The Unintentional Employment Or Co-employment Relationship

The decision of the South African Labour Court in Electronic Media t/a M-Net v Leon Potgieter and Others presents a cautionary tale on what not to do when dealing with employees if the intention is not to be found to be an employer.

Background

In this matter, Mr Potgieter was originally employed by Electronic Media Network ("M-Net"). He later concluded two further employment contracts with two separate entities in Nigeria, both of which were in the same group as M-Net. Both of these further employment contracts contained a clause that provided that the agreement supersedes any previous employment contracts between Mr Potgieter and other group entities. While he initially worked in South Africa, Mr Potgieter eventually relocated to Nigeria from where he tendered his services. Ultimately, Mr Potgieter was dismissed for operational requirements in terms of section 189 of the Labour Relations Act, 1995 ("LRA"). Pursuant to this, he referred an unfair dismissal dispute to the Commission for Conciliation, Mediation and Arbitration ("CCMA").

During the CCMA proceedings, M-Net raised three preliminary points, one of which was to the effect that the CCMA had no jurisdiction to determine Mr Potgieter's dispute because it was not his employer.

The CCMA commissioner dismissed this preliminary point on the basis that in substance, M-Net was Mr Potgieter's employer, or possibly a co-employer. The CCMA commissioner ruled that the CCMA had the requisite jurisdiction to deal with Mr Potgieter's dispute. Aggrieved by the ruling, M-Net brought an application in the Labour Court to review and set it aside.

The Labour Court decision

In determining the review application, the Labour Court re-emphasised the old adage that the true nature of the relationship between the parties must be considered, regardless of the manner in which the relationship has been structured.

The Labour Court considered the following factors to be relevant in determining the dispute:

• Mr Potgieter reported to and rendered services to the benefit of M-Net;
• Mr Potgieter took instructions from M-Net's chief financial officer based in South Africa and the latter also determined his performance objectives and salary increases;
• while Mr Potgieter was remunerated by the Nigerian entity in which he was employed, the payment of the remuneration was ultimately for M-Net's account; and
• it was M-Net's human resources manager based in South Africa who issued Mr Potgieter with a notice in terms of section 189 of the LRA and eventually terminated his employment.

In applying substance over form, the Labour Court found that an employment relationship existed between M-Net and Mr Potgieter. The Labour Court held that, viewed cumulatively, the above factors indicated that Mr Potgieter remained under M-Net supervision and control at all relevant times, despite the fact that he was employed and based in Nigeria.

One of the more interesting factors that the Labour Court found to be decisive of the fact that M-Net was Mr Potgieter's employer was the mutual separation agreement that M-Net had prepared and provided to Mr Potgieter during the section 189 retrenchment process. This agreement was signed on M-Net's behalf by its chief executive office and human resources manager. While Mr Potgieter did not accept or sign the agreement, on several occasions in the agreement M-Net referred to itself as Mr Potgieter's employer. This was opposed to referring to the Nigerian entities which it alleged were Mr Potgieter's employer. While M-Net argued that the references to it as Mr Potgieter's employer were made in error, the Labour Court held that M-Net's description of itself as the employer was deliberate. The Labour Court found that the agreement reflected M-Net's state of mind as to the nature of the relationship between itself and Mr Potgieter, particularly in circumstances where M-Net's most senior management had signed the agreement and could offer no explanation for why this was the case.

Consequently, the Labour Court held that while Mr Potgieter was employed by a Nigerian entity, he maintained an employment relationship with M-Net, or at the very least, M-Net was a co-employer with the Nigerian entity. This was the position until the termination of Mr Potgieter's employment.

Another issue raised by M-Net during the course of the review application was whether the CCMA had the territorial jurisdiction to determine Mr Potgieter's dispute. In determining this issue, the Labour Court applied the "locality of the undertaking" test that had previously been developed by the Labour Courts and had been specifically applied by the Labour Appeal Court in Monare v South African Tourism and Others.

In applying this test, the Labour Court held that, because the undertaking in which Mr Potgieter was employed, namely M-Net, was based in South Africa, and in considering the same factors that were considered when the court dealt with the first jurisdictional point, the CCMA was vested with the necessary territorial jurisdiction to determine Mr Potgieter's dispute.

Ultimately, the Labour Court found that the CCMA commissioner was correct in ruling that the CCMA had jurisdiction to determine Mr Potgieter's unfair dismissal dispute and, on this basis, it dismissed M-Net's review application.

Thoughts on the judgment

This judgment should come as a warning particularly to multinational employers if the intention is to create an "arms-length" relationship between itself and various entities within its group. Great care must be taken not to unintentionally create an employment relationship with employees who are, on paper, employed by another subsidiary company. The failure to ensure that there is sufficient distance between the parent company and the employees of various subsidiaries may result in a court finding that a co-employment relationship existed, however unintentional the creation of such relationship may have been.

This article was reviewed by Peter le Roux, an executive consultant in ENSafrica's employment department.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.