Retrenchment and Other Creative Workarounds

By Tim Germond, BSocSci - LLB UCT

Following the COVID pandemic, the decline in the global and local economy has resulted in thousands of businesses around the world, both large and small, being forced to liquidate and thus hundreds of thousands of employees losing their jobs.

The financial crisis has shown little evidence of improving in most sectors, with war on the horizon of developed countries. There has been a significant increase in the number of businesses being forced to reduce overheads, with owners and managers having to return to the drawing board in order to streamline their businesses in an attempt to stave off liquidation.

Businesses cannot rely on a sudden upturn in the market to help keep it afloat, and as a result more and more businesses are compelled to take active measures to ensure their survival.

One of the first solutions most business owners consider is retrenching employees which, when done properly, can be an effective measure to reduce costs, but it is not the only option. By examining the nature of retrenchments, the procedures that need to be followed according to local legislation, as well as possible alternatives, a light begins to appear at the end of the tunnel. The South African Labour legislation may at first sight appear highly restrictive. But on the other side of the coin, this can be used to the business’ and the employees’ advantage in infinite ways.

Retrenchment is often seen as a means of cutting operational costs in an attempt to save a financially ailing business establishment from eventual collapse, and thus many people take the view that retrenchments are only an option when a business is doing badly - however this is not the case.

In Which Instances Can a Business Consider Retrenchment?

Retrenchments allow businesses to dismiss employees for operational requirement which may include:

1) a desire from the owner or shareholder to lower the overhead costs of the business and thus increase their profit margins;

2) a need or desire to restructure the business plan or organogram;

3) a position becoming redundant due to the advent and introduction of new technologies;

4) or any combination of the above

However, as often as not, retrenchments occur due to a business encountering financial difficulties.

A core aspect of any retrenchment is to ensure that employees and their representatives are involved with the business from the outset in a ‘joint, meaningful consensus seeking process.’ What this means is that prior to determining whether the business will be retrenching employees, the employees are issued with a notice regarding the potential retrenchments whereby the employees and their representatives are invited to consult on various aspects of the possible retrenchment in the form of a joint problem-solving exercise in an attempt to reach a possible agreement.

The notice must contain:

• the reasons that the business is contemplating retrenchment,

• any alternatives to retrenchment that the business can offer,

• the number of employees who may be affected,

• the selection criteria that the business is considering using in order to determine which of the affected employees may be retrenched (for example LIFO- meaning Last In First Out and thus the selection criteria is based on years of service),

• when the business would like the proposed retrenchments to be concluded,

• the possible severance pay should the retrenchments proceed, which must be a minimum of one week’s pay for every completed year of service (this is the minimum however it may be higher depending on sectorial determinations).

It will also include any assistance the company can offer to an employee who may be retrenched, the possibility of re-employment, the number of staff employed by the business, as well as the total number of employees dismissed for operational requirements in the 12 months preceding the notice.

Due to the fact that retrenchments do not arise from any misconduct or fault on the part of the employee it is known as a "no fault dismissal," and as with all dismissals in South African law, retrenchments are still subject to the Constitutionally guaranteed right of ‘fair labour practice,’ which means that the retrenchment must be both procedurally fair (done in accordance with the proscribed letter of the legislation) and substantively fair (the business must have a valid reason for the retrenchments). If you are not sure retrenchment si the right thing for your business right now you may want to consider other options.

Seven Options to be Considered Aside from Retrenchment

In many cases it is hard for a business owner to consider losing valued staff members due to commercial pressures, at the very least it is considered a laborious and difficult process by most which is why it is worthwhile considering the alternatives provided for within the law. One of the core requirements of the law in the case of a proposed retrenchment is to explore all appropriate measures to avoid dismissals, in other words to look at the possible alternatives to retrenchment that can be agreed upon by the parties during the consultation process. There are numerous ways to make the law work for you and each case is different, but below are some of the more common alternatives;

1) ‘Bumping,’ is effectively the re-deployment of potentially affected employees to alternative positions within the business and this includes positions that have a lower salary or may be deemed to be a lower level position.

2) Placing a moratorium on overtime work, reducing night shifts or decreasing or eliminating contractors or casual labourers by using current employees to fulfil the roles that were previously filled by casual labourers or contractors.

3) Offering voluntary severance packages or voluntary early retirement packages.

4) Placing a moratorium on recruitment and allow the total number of employees to drop from natural attrition (resignations, dismissals and retirements etc.). This solution also means that a business is able to train up its current employees to meet the business’s needs, which in itself benefits the business in the long run.

5) Looking at implementing short time measures, whereby the salaries of employees are reduced as are their hours of work. It may also be possible, in smaller businesses, for all staff to agree to a salary reduction in order to avoid the retrenchment of fellow employees.

6) Temporarily implement lay-offs, meaning that some employees are placed on unpaid leave for a specific period of time in the hope that during the period of leave the business’s financial situation will have improved, thus alleviating the need for the proposed retrenchments.

7) Outsourcing a function performed by the employees to a company formed and staffed by employees who may be affected by the possible retrenchment.

I want to Avoid Retrenchment but the Solutions Presented Above Don’t Suit my Business

Before entering into the retrenchment consultation process you could also look at deeper practices regarding people management:

1) Ensure that one’s business has proper policies, procedures, job descriptions and key performance indicators in place in order to adequately manage employees. This could mean that instead of retrenchment, staff numbers could be reduced by removing the employees who commit misconduct or are not performing to the required standard, while at the same time helping to raise the standard of work in the business.

2) Enforce the retirement of employees who are beyond the age of retirement and that all discretionary bonuses could be deferred, limited or cancelled until further notice.

3) Take advantage of the benefits offered by labour law. For example, ensure that the maximum SETA levy refunds have been applied for and received, looking into any and all discretionary grants or State subsidies that may be applicable to one’s business.

However, having said this, it must be kept in mind that every business is unique and as such every considered retrenchment would have its own issues that need to be dealt with and pitfalls that need to be avoided.

Furthermore, should the correct procedure not be followed; the retrenched employee may take the business owner to the Commission for Conciliation, Mediation and Arbitration (CCMA); an independent arbitrator or even the Labour Court, where the business will, in all likelihood, be forced to pay the retrenched employee a large settlement in way of compensation for unfair labour practice. It is for this reason that, if one is currently contemplating retrenchment, it is highly advisable to have a legal consultant assist one with the process and ensure that the retrenchment process is both procedurally and substantially fair.

Staff restructuring can be a complicated and lengthy process for businesses to manage. Should you require further information, please contact us for advisory services regarding retrenchment and other labour practices - rose@virtuehrsolutions.com