Fair Retrenchment

These notes are simply meant to assist employers and employees affected by retrenchments to understand the basic legal requirements in effecting a fair retrenchment.

As with the notes on fair dismissal these are not intended to be an authentic text on the law of dismissal based on operational requirements.  These should be seen as merely a basic guideline.

A) RETRENCHMENT OR REDUNDANCY
  1. Semantically speaking there is a distinction between retrenchment and redundancy as grounds for dismissal based on operational requirements.

RETRENCHMENT generally refers to termination of employment due to the financial / economic viability of the enterprise.  In other words, due to the downturn of the economy, a recession or fall off in business or sales, it is in the company’s financial interests, in order to safeguard its continuing existence, to reduce its labour costs.  This of course implies that if and when business picks up again the need to re-employ persons becomes a possibility.

REDUNDANCY generally refers to the need to do away with a particular job.  The job is made redundant resulting in the person engaged in that job no longer having that job.  This could be due to mechanization, computerization, or other technology, or restructuring in the business resulting in loss of jobs.

Irrespective of whether the process is one of retrenchment or redundancy, the way in which it should be handled is similar in both aspects.

B) SUBSTANTIVE FAIRNESS

The employer must be able to show that there is a sound reason for having to retrench or make staff redundant.

C) PROCEDURAL FAIRNESS
  1. Section 189 of the Labour Relations Act (66/1995) sets out the requirements in law when effecting dismissals based on operational requirements.
  2. The fundamental steps which an employer should follow are:
  • firstly consider at senior managerial / Board level what steps can be taken to avoid any retrenchments / redundancies. Where practical these should be implemented at as early a stage as possible.
  • if no measures are foreseeable, notify employees in writing of the possibility of retrenchments in the company.
  • prior consultation must take place with either –
  • those parties the employer has undertaken to consult with in terms of a collective agreement; or
  • the trade union whose members are likely to be affected by retrenchments; or if none of the above apply,
  • the employees themselves or a nominated representative.
  • the purpose of the consultation must be to consider with the consulting party ways to avoid or minimize the retrenchments, to select which employees might or should be retrenched, when the retrenchments should take place, and what severance pay should be paid out to employees.
  • the employer is required to disclose in writing relevant information pertaining to the possible retrenchments. This information is identified in the Act.
  • the employer party should give the consulting party time to consider the proposals. The amount of time would depend on the circumstances of the need to retrench.  It is generally unacceptable to provide no time to the affected employees to consider the possibility of retrenchments unless the employer can show really good reasons for truncating the process.
  • the employer must consider the selection criteria which must either be agreed with the consulting parties or be found to be fair and objective.
  • the legally required severance package must be based on at least 1 week’s remuneration for every completed year of service. However where the employee has refused a reasonable offer of alternate employment, the employer may not be obliged to pay the employee a severance package.  All payments in respect of a termination package in cases of retrenchment are taxable in terms of the Income Tax Act.  Based on the receipt of a tax directive from the Receiver of Revenue the Receiver may grant certain relief on tax deductions for severance pay in cases of retrenchment / redundancy.