Industrial Relations and Legal Services

Retrenchments are an aspect of business that many employers hope is never a reality for their businesses. With unpredictable markets, a slow-growing economy, the effects of COVID-19 and increased competition, many companies are having to implement retrenchments in order to remain open and profitable.

Employers often do not understand that several procedures need to be followed when retrenching employees in order to ensure that the retrenchment is fair. These legal requirements are outlined in the Labour Relations Act (LRA) and the Basic Conditions of Employment Act (BCEA);  the onus is on the employer to follow the correct procedures. If these procedures are not conducted effectively and correctly, you could end up at the Centre for Dispute Resolution or even the Labour Court, which could bear a heavy price. We examine the procedures for fair retrenchments in more detail below.

What are retrenchments and when to consider them?

In order to understand the retrenchment process, we need to define retrenchments. A retrenchment is a form of dismissal due to no fault of the employee. Section 213 of the Labour Relations Act defines operational requirements as “requirements based on the economic, technological, structural or similar needs of the employer”. More often than not, when a business is in financial distress, an employer would dismiss employees due to its operational requirements. Below we define these operational requirements in more detail:

• Economic requirements – in general terms, “economic requirements” refers to the ability to make a profit or to retain sufficient funds to continue operations. These reasons may not relate to the business’s current financial state, but may refer to its projected financial circumstances. In this case, a company is often no longer in a financial position to employ all its current employees.

• Technological requirements – these requirements often refer to the introduction of new technologies, systems and techniques that reduce the need for labour and make certain jobs redundant. Examples of these include innovative machinery, computer packages and electronic systems. These technological advances often result in the faster completion of tasks and reduce the need for the number of employees needed to perform operations.

• Structural requirements – these requirements often relate to the need to flatten the management structure in relation to challenges or progress within the workforce. In this case, positions become redundant when structural changes need to be made. These changes are then reflected in the business’s organogram or organisational chart.

It is essential to note that an employer needs to provide fair reasons and genuine operational requirements for the retrenchments in order for them to be considered honest, just and in good faith. An employer cannot use a retrenchment as a way to dismiss undesirable employees.

Correct and fair retrenchment procedure

As mentioned above, it is imperative that the retrenchment process is fair. To ensure this, an employer will need to follow the procedural guidelines and proposed method for retrenchments outlined in Section 189 of the Labour Relations Act as well as Sections 35, 37 and 41 of the Basic Conditions of Employment Act. This process has been outlined in the steps below:

1. Consultation

The employer will need to first provide written notice of the proposed retrenchment plans and invite the consulting employees/party to consult with it on this matter. The written document will need to include all relevant information related to the proposed dismissals.

The employer and employees will then consult with each other with the aim of coming to an agreement. This consultation process refers to a joint consensus-seeking process between the employer and the employees or employee representatives. This process must take place as soon as the employer contemplates retrenchment with:

• Any person the employer is obliged to consult in terms of a collective agreement;

• If there is no collective agreement, a workplace forum;

• If there is no workplace forum, a registered trade union whose members are likely to be affected or

• the employee/s likely to be involved and affected

The process of consultation aims to provide solutions that aim to:

• avoid the dismissals (examples of solutions could include adjusting working hours, eliminating temporary labour, eliminating overtime, offering early retirement, etc.);

• minimise the number of dismissals;

• adjust the timing of the retrenchment;

• provide ways to lessen the effects of the retrenchment;

• provide information on the method for selecting the employees to be dismissed; and

• discuss severance pay options.

2. Disclosing information in writing

The second step of the retrenchment process requires the employer to give written notice to the employees or their representatives that discloses all relevant information. This includes:

• a valid reason for the proposed retrenchments;

• the alternatives considered by the employer to avoid the retrenchments and the reasons why these were rejected;

• the number of employees that will be affected as well as their job categories;

• the selection criteria that will be utilised for selecting employees;

• the timing of the dismissals;

• the proposed severance pay;

• what assistance the employer will offer the employees who have been retrenched (examples of this could include offering employees time off to attend interviews, an early release should a new job be found, issuing letters of reference, etc.); and

• the possibility of future re-employment.

During this process, the consulting employees may request the employer to disclose more information if they feel that the information provided is not sufficient.

3. Opportunity for feedback 

Once the information has been submitted in writing, the employer must give the consulting employees the opportunity to make presentations that must be considered and responded to.

4. Criteria for selection

The criteria for selecting employees for retrenchments need to be fair and objective. In many cases, the employer may turn to the accepted selection criteria outlined by the CCMA’s Code of Good Practice on dismissal based on Operational Requirements. This code includes criteria based on “last in,  first out” (LIFO), the length of service, performance, skills and qualifications. Each of these elements must be examined when selecting employees for retrenchment.

It must be mentioned that the above process is for small-scale retrenchments of a business with fewer than 50 employees. The procedure for larger-scale retrenchments, where the employer has more than 50 employees, has been adapted in accordance with Section 189A of the Labour Relations Act, which can be viewed here.

Payment packages types and how to calculate them 

Payment packages are often an area of concern for both employers and employees, which is why there are guidelines contained in the BCEA for different payment packages related to retrenchments. These include:

• Severance pay –  Employees should be paid at least one week’s remuneration for each completed and continued year of service. In this case, remuneration includes the employee’s basic salary, payment in kind and discretionary payments related to performance and working hours. Should an employee unreasonably refuse an offer of alternative employment, he/she will not be entitled to a severance package, according to Section  41(4) of the Basic Conditions of Employment Act).

• Leave pay – all outstanding leave is to be paid out; this includes annual leave or time off that has not been taken.

• Notice pay –  If employed for less than six months, one week’s notice pay must be paid to the employee. If employed for more than six months but not more than one year, two weeks’ notice pay must be paid to the employee. If employed for more than a year, four weeks’ notice must be paid to the employee. The employer may require employees to work/not to work during the notice period.

• Ex gratia payment – a collective agreement may stipulate ex gratia payments, over and above the severance pay upon the retrenchment of employees.

Legal consequences for unfair retrenchments

If an employee feels that they have been unfairly retrenched and that they may have a case for unfair dismissal, they are able to approach the CCMA or a Bargaining Council and dispute the retrenchment. Retrenchment cases will need to be submitted within 30 days of the retrenchment. If this process is unsuccessful, the employee/s can then refer this matter to the Labour Court.

If it is found that the retrenchment process was unfair or if the correct procedure was not followed, the Labour Court can require the employer to rehire the employee or compensate the employee with 12 months’ remuneration. On the other hand, where it is found that the actual reason for the retrenchment was based on any form of discrimination such as race, religion, sexual orientation etc., the compensation amount can be as much as 24 months of remuneration.

Conclusion

Retrenchments have a significant impact on employees and a business as a whole, especially in a country like South Africa where the unemployment rate is so high. In order for the rights of retrenched to be protected, the legal aspects of the retrenchment process, as outlined by the Labour Relations Act and the Basic Conditions of Employment Act, must be adhered to and appropriate measures are taken. These measures are in place to protect employees, reduce job losses and ensure that businesses comply with the law. If retrenchments are conducted unfairly and not as per the outlined procedures, the company will be penalised and negatively impacted.

For access to more information related to labour law and retrenchments, sign up to our SEIFSA resources portal.

In South Africa, it is a legal requirement that everyone you employ, as an employer, has a written employment contract. The employment contract outlines the conditions of employment and includes information with regards to the following circumstances: what is expected from the employee, annual leave, job title, hours of work, remuneration and more.

In the Main Agreement, this is not so, unless it is a Limited duration contract in which the Main Agreement serves as the outline. However, we do strongly recommend that employees be given a contract to encourage clarity and give certainty.
We examine what an employment contract is, the advantages for both the employee and the employer and do’s and don’ts for drafting an employment contract in more detail below.

What is an employment contract?

In simple terms, an employment contract falls within the scope of commercial contracts, hence it needs to be in writing. An employment contract is an agreement between the parties (employer and employee) and serves as the primary evidence relied upon to enforce the parties’ contractual rights.

An employment contract regulates the terms and conditions of employment between the employer and the employee. It includes information on what the employer will provide and specifies what the employee is entitled to in relation to company policy, benefits and labour legislation for the specific work performed.

The employment contract is governed by the Basic Conditions of Employment Act (BCEA) and is required by law to be presented to the employee no later than the first day of commencement of employment. An employment contract needs to be agreed upon in the form of written consent.

There is no such requirement in the Main Agreement as explained above.

It is important to note that there are different types of employment contracts that relate to the employment being offered. Each of these types of employment, which include permanent, fixed-term, probation and project employment, have been set out in the Labour Relations Act, 2014 (Act No. 6 of 2014) (LRA) and relate to the way in which employees will be employed. These include:

• Permanent employee: A permanent employee is employed for an undetermined period of time at their place of work. A contract of employment for an undetermined period of time has no agreed date of notice of termination (except retirement age). Such a contract is terminated by either the employer (dismissal) or the employee (resignation) on notice.

• Part-time employees: A part-time employee is a person compensated based on the period of time s/he works (the hours s/he works), which is less than the period of time the employer’s permanent employees work.

• Fixed-term employee: A fixed-term employee, also known as a temporary employee, is a person employed for a determined period of time. This is usually no more than three months of employment. A contract of employment for a determined period of time has an agreed date of termination, being either a specific calendar date or the occurrence of a specific event.

The Main Agreement has specific rules on Fixed Term Contracts, called Limited Duration Contracts, which take precedence over the LRA in this specific area.

What elements are included in an employment contract?

When drafting an employment contract, several material issues need to be considered. These are often referred to as essentiala (essential elements), and they must be present in the contract for the contract to be legally sound. These essential elements would typically be the rendering of services by the employee for remuneration paid by the employer. It would also include job description, non-disclosure of trade secrets, compensation, normal payment, etc. If these essential elements are not contained in a contract, the contract could be void due to vagueness and, therefore, be unenforceable.

An employment contract also usually includes additional clauses, which are often referred to as naturalia. These provisions would relate to leave, overtime, termination of employment, sick leave cycle, maternity leave, incapacity and deductions. Included in these clauses would be a section on the family responsibility leave days available. These provisions include if the employee’s child is born, if the employee’s child or adopted child is sick, as well as the death of the employee’s spouse or life partner, the death of the employee’s parent, adoptive parent, grandchild, grandparent, or sibling.

The naturalia section would highlight all the specifics regarding what would happen in the case of an illness, such as the need to bring a medical certificate from a medical practitioner to work on the day of an employee’s return. This applies if the employee is off work for more than two consecutive days or if s/he  has been absent on more than two occasions in an eight-week period, as highlighted in Section 23 of the BCEA. It also specifies the remuneration for employees working on official public holidays, such as New Year’s Day, and Sundays.

The Main Agreement also refers to having to produce a sick note on Mondays and Fridays, and before and after public holidays.

All of the elements mentioned in the naturalia section are legal requirements that are governed by either employment legislation (BCEA) or a collective agreement in a particular sector (such as the Main Agreement for the Metals Industry). These provisions naturally find application in employment contracts by law and serve as the bare minimum and cannot be “contracted away”. It will always benefit both parties to include these provisions since they express inclusion.

Why is it important to draft an employment contract?

The main objective of drafting an employment contract is to ensure that both the employee and the employer know what is expected of them. In this way, both parties are protected against any breach or unlawful action relating to the conditions of employment.

An employment contract also protects the employer. If all the company’s policies, disciplinary codes, etc., are included in the contract, the employee will have all the information necessary to ensure that s/he adheres to those standards and requirements. In the same way, the employee is protected by having all elements related to employment included in the contract, meaning that the employer cannot take advantage or act unlawfully towards the employee.

Our SEIFSA Employment Contract Do’s and Don’ts

Drafting a sound and enforceable contract takes a considerable amount of skill and understanding of employment law and complex substantive contract law. However, employment contracts do need to be drafted with employment legislation in mind and to comply with relevant statutory prescriptions. It is essential that an employment contract is clear, has a logical structure and incorporates the rules of best practice.

To make the process of drafting an employment contract a little simpler, we have put together a list of Do’s and Don’ts below.

Employment Contract Do’s:

• Do start with a generic form as a guide and adapt it to your particular situation and make sure to address issues prescribed by employment legislation, such as working hours, leave, deduction of monies and salary or wage.

• Do title the document “EMPLOYMENT CONTRACT” so that there can be no mistake as to its intent.

• Do make sure the parties are properly identified in the first paragraph, that names are spelt correctly and that addresses are accurate.

• Do date the contract on the day it was signed and indicate where it was signed. If the parties sign on different dates, the date of the contract will be the date when the last party signs. Also, include the date of commencement of employment (and termination date if the contract is temporary in nature).

• Do use common-sense headings to make it easier to find particular provisions in the contract.

• Do number the paragraphs for ease of reference.

• Do use plain language whenever possible.

• Do define all technical terms.

• Do consider the placement of punctuation marks, since even a misplaced comma can change the meaning of a sentence.

• Do carefully review the use of conjunctions, especially “and” and “or,” since the word you choose can have a dramatic impact on meaning, and preferably draft your contract in the active voice.

• Do make sure that the contract addresses all possible contingencies and that nothing is left to chance.

• Do have your SEIFSA IR and Legal expert review every contract before you sign it.

• Do ask your SEIFSA IR and Legal expert any questions you may have about the contract — remember, there is no such thing as a stupid question, but it can be stupid to let a question go unasked and unanswered and pay for it later.

• Do initial every page of the contract and make sure the other party does the same so that nothing is missed.

• Do include notarisation, if required by applicable law.

• Do retain a copy of the contract for your records.

Employment Contract Don’ts:

• Don’t include legalese or archaic phrases like “the party of the first part”, “heretofore,” etc. They generally add little in terms of clarity.

• Don’t include overly long sentences; instead, break sentences down into easily digestible thoughts.

• Don’t be repetitive – unless it is absolutely necessary to do so. It is preferable to refer back to a previous provision according to its number or heading, rather than to repeat it verbatim.

• Don’t assume the other party defines terms the way you do. If there is any doubt, include a definition in the contract.

• Don’t read the contract hurriedly. It takes time to understand all the possible nuances of the language used.

• Don’t accept the other party’s oral explanation of a confusing term. Include everything in writing.

• Don’t start acting according to the terms of the contract until both parties have signed it.

• Don’t agree to a modification of the contract without getting it written and signed by both parties.

• Don’t assume that the use of a standard or form contract eliminates the need for your lawyer’s review. Even if a standard contract worked well in one instance, a change of circumstances, date, or party could change the whole equation.

Conclusion

Employment contracts are required by law and need to add clarity to the employment terms by including information related to working hours, job requirements, leave, remuneration and more. This legal contract protects both the employee and the employer and ensures that there is no unlawful action from either party. To get your free employment contract template, sign up to our SEIFSA resources portal.