Retrenchments: What is the correct procedure?

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.

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