Labour law | The reality of retrenchment

Prof Haroon Bhorat from the University of Cape Town School of Economics told the 22nd annual labour law conference that retrenchment figures showed a 36% increase in the period from January 2008 to January 2009, compared to a 14% increase from 2006 – 2007.

A total number of 4899 firms retrenched employees from January 2008 to January 2009 in South Africa.

According to the Quarterly Labour Force Survey July–September, 2009 (Q3:2009) there was an annual decrease of 5,6% in employment; an increase in the number of unemployed persons and a huge increase (over 1 million) in the number of persons who are not economically active – approximately half being discouraged work-seekers, as compared to Q3:2008.

About retrenchment
The Labour Relations Act (LRA) permits employers to dismiss employees for “operational requirements”, also known as retrenchments. An employer can retrench employees in cases where the company is experiencing financial hardship, but also in cases where the employee’s job becomes redundant through a restructuring process, or where the employer wants to reduce costs and/or wishes to increase the profitability and productivity.

Employers need to be careful
However, employers are advised to tread carefully when carrying out retrenchments. Employees rights are well protected by the LRA, and uncalculated retrenchments could end up in the Labour Court, with a judgment stating that the employer must reinstate the retrenched employees, or pay them hefty compensation and legal costs.

If an employer wants to retrench an employee, the retrenchment must be fair. Fairness is decided on two grounds – substantive fairness, and procedural fairness.

“Substantive fairness” weighs up whether the retrenchment was appropriate in the circumstances. It must be a reason based on the employer’s operational requirements. It must be a reason that is fair, lawful, reasonable under the circumstances, justifiable (provable) and based on sound business rationale.

When is retrenchment not unfair?
In the case of retrenchment, the law says that it is not unfair for an employer to retrench an employee if the employer:

If an employer is retrenching for financial reasons – and this is usually the case – the employer must be able to reasonably prove that there is a connection between his financial constraints and the need to retrench.

What employers need to show
Employers must also be able to show that the criteria used to select employees to be retrenched supports this financial reason. In other words, employers must be able to show what savings would be achieved by retrenching the selected employees or was required for the sustainability of the business.

“Procedural fairness” considers the rights of the worker to be treated justly in the process of retrenchment. The procedure is clearly laid down step-by-step in section 189 and 189A of the Labour Relations Act.

Where are most retrenchment occuring?
An overwhelming majority of retrenchments occurred in companies with less than 50 employees. More than 50% of all liquidations in the past year have been of small and medium-sized enterprises. Bearing this in mind, it is vital that small and medium sized enterprise business owners and managers are well educated in applicable labour legislation and best business practices.

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