Understanding Retrenchment in South Africa

Retrenchment is a term used in the context of business and employment. It refers to the process of reducing or downsizing a company’s workforce to cut costs and improve financial stability. 

It typically involves laying off employees or terminating them for various reasons, such as economic downturns, restructuring, mergers, or the need to streamline operations.

What is the Difference Between Retrenchment and Dismissal?

Retrenchments and dismissal differ based on misconduct or incapacity/incompatibility.

Retrenchments should be distinguished from dismissals where the reason originates from an act or omission or conduct of an employee. The initiative for retrenchment can only arise from the employer and not the employee. This is not the position for dismissals based on misconduct or incapacity/incompatibility.

A discussion on misconduct or incapacity/incompatibility is reserved for the future. Misconduct constitutes in itself a separate discussion and incapacity/incompatibility another discussion. Incompatibility in itself may, however, constitute wilful incompatibility which equals misconduct, but unwilful incompatibility should instead be treated as a form of incapacity.

The term “retrenchment.”

The term “retrenchment” is possibly a word that sends a shock wave amongst employees when such a term is used in the work environment.

“Retrenchments” are the order of the day due to the challenging economic climate in which South Africa presently finds itself.

 The term “retrenchment” is the common term for the terminology used in the Labour Relations Act, 66 of 1995 (“LRA”). The LRA acknowledges the right of employers to terminate employment on the basis of the “operational requirements” of the employer.

 In other words, termination of employment on the basis of the operational requirements of the employer results from the need of the employer to reduce the total number of employees employed for operational requirements.

What constitutes “operational requirements”? 

The term “operational requirements” is not defined in the LRA, and put otherwise, it means that due to the requirements of the employer, termination of employment may have become necessary.

Operational requirements may include advances in technology (artificial intelligence replacing humans, robots etc.), the change in the business strategy of an employer, the economic climate etc.

The procedure for retrenchments

The LRA prescribes the procedure in section 189, which an employer must follow when anticipating dismissing an employee based on the operational requirements of the employer.

Important aspects to be taken into account by both employers and employees when faced with the issue of retrenchment are the following:
  • An employer must give prior notice to the employee(s) of its anticipation of termination of employment (“retrenchment”).
  • The stated reasons for the anticipated retrenchment must be real and not artificial in order to terminate employment if no real operational reasons, therefore, exist.
  • Employers cannot abuse the retrenchment process for want of dismissing an employee(s) for reasons other than real operational requirements.
  • A process of proper consultation in terms of section 189 must be followed, and not a one-sided process leading to termination of employment under circumstances where such could have been prevented by alternatives.
  • The employer and employee(s) must attempt to reach a consensus on the issues as set out in section 189 but cannot be compelled to do so.
  • If the employer and employee(s) cannot reach a consensus, the employer has the right to proceed with the process unilaterally but on the basis of still following the “fair” procedure in terms of section 189.
  • The employer and employee(s) may agree in terms of a so-called “Separation Agreement” to a contractual termination of employment in substitution of a forced process which may lead to termination of employment.
  • The decision to retrench may not have been taken in advance by the employer, and the process, in terms of section 189, used as a “smoke screen” in order to terminate the services of an employee(s) on a pre-determined basis.
  • Any number of employees may be retrenched – namely one or more, depending on the operational requirements of the employer.
  • If the process leads to termination of employment, the “retrenchment payment to be made by the employer is regulated by the Basic Conditions of Employment Act, 75 of 1997 (“BCEA”) – also so-called notice pay.
  • Obviously, discriminatory considerations cannot be used for retrenchment purposes, save for “employment equity purposes” regulated by the Employment Equity Act 55 of 1998 (“EEA”) and others.

Notice pay 

Section 41 of the BCEA regulates “severance pay” if an employee(s) is/are dismissed on the basis of “operational requirements” (retrenched).

A minimum of four weeks’ notice must be paid, as well as severance pay equal to one week’s remunerations for each completed year of continuance service with the employer. 

Certificate of service

In terms of section 42 of the BCEA, an employer must also issue the retrenched employee(s) with a certificate of service and, if required by the employee(s), the reason for termination of employment. The latter aspect is essential as an employee(s) seeking future employment may then prove that their termination of service is not related to misconduct or incapacity but to operational requirements – which were beyond the control of the employee(s).

Disputes about unfair “retrenchments.”

If an employee(s) is unfairly dismissed, they may refer a dispute to the CCMA if only one employee was affected. If more than one employee were involved, the Labour Court has the ultimate jurisdiction to determine the dispute.

The dispute must be referred within 30 calendar days of termination of service and must first be directed to the CCMA for conciliation before the matter can be further referred to arbitration in the CCMA or the Labour Court.

The conciliation process is the first level of dispute resolution and is informal. At this stage, the presiding commissioner may attempt to have the parties reconciled or reach an agreement. The commissioner has no binding authority to make any awards at this level, and if they fail in negotiating a reconciliation or settlement, they will issue a certificate of non-outcome, whereafter the employee(s) may refer the matter further to arbitration or the Labour Court.

A referral may also be made to the relevant Bargaining Council if the business of the employer falls within the jurisdiction of a relevant Bargaining Council. 

Before an employee(s), therefore, refer to a dispute based on unfair dismissal, the jurisdiction of the CCMA or a Bargaining Council should first be determined. Some, but not all, industries resort under a Bargaining Council, such as motor manufacturing, steel, hair, nursing and other industries/professions.

The award

If a dispute is arbitrated by the CCMA or a Bargaining Council, alternatively determined by the Labour Court, and if an unfair dismissal is found to have occurred, a retrospective reinstatement from the date of discharge, alternatively re-employment from a date as determined, or compensation may be awarded/ordered. 

Dealing with Retrenchment

Making the decision to implement retrenchment can be a difficult process for both employers and employees alike. For companies, it can be a necessary step to adjust to evolving market circumstances and ensure financial stability. However, this can have significant consequences on the employees who are affected, leading to job loss and financial struggles.

Whether you’re an employer seeking guidance on the retrenchment process or an employee needing assistance with your rights and entitlements, SB Lawyers has you covered.

Don’t face these challenging situations alone – reach out to us today for personalised legal counsel and support. Your future and the future of your business matter to us. Contact us to schedule a consultation and take the first step towards a smoother retrenchment process.

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