Retrenchment?

The importance of preparing your company to downsize

In the current economic climate, it has become increasingly necessary for many companies to start taking a hard look at their operational costs and find ways of maximizing productivity while minimizing expenditure. The fact that labour costs ordinarily constitute the lion’s share of a business’ expenses makes it the first target for penny-pinching managers and often times this will result in a management decision to reduce the workforce as a “quick-fix” to rebalance the books. The problem with this approach, however, is that managers fail to grasp the legal complexities of a “Retrenchment” process, or Dismissals for Operational Requirements as it is legally known. Not only are there very specific procedural requirements which a company must adhere to, but there also exists a single major cost implication which could, in many cases make the decision to downsize less attractive to management who are seeking interim short-term relief to budgetary pressures. Additionally, failing to prepare for the massive expense of such dismissals may very well turn out to be the final nail in the coffin of small businesses. Sections 189 and 189A of the Labour Relations Act, 1995 provide the outlines of the procedure that must be followed and Section 189A(13)(c) allows the Labour Court to reinstate* employees who were dismissed without such procedure.

So many sections, so little time…

A major concern with the procedures outlined for dismissals for operational requirements has been the manner in which complexity increases as the number of employees being considered for possible dismissal increases. To address this, the Act has determined a mechanism to prescribe two separate sets of procedures for employers, dependent on the size of their organizations. Section 189 of the Act applies to companies who employee, in total, less than 50 employees, while Section 189A applies to employers with more than 50 employees under certain circumstances. The basic procedure, however, remains the same.

The procedure to be followed:

The procedure that a company must follow in this instance is firstly to invite the relevant parties to a consultation process, during which the parties must, in terms of Section 189(2) engage in a meaningful joint consensus-seeking process and attempt to agree on:

• Measures to avoid dismissals
• Minimising the number of dismissals
• The timing of dismissals
• Mitigating the effects of dismissals
• Selection criteria
• Severance pay

The parties who the employer must engage in this process are defined by Section 189(1) as:

• Any registered trade union whose members are likely to be affected, regardless of whether that union is recognized within the company.
• Any employees who are likely to be affected.

When inviting the parties outlined above to attend the proposed consultation process, the Employer must issue a written invitation in terms of Section 189(3) of the Labour Relations Act, 1995, which must disclose the following points to the consulting parties:

1. The reasons for the proposed dismissals:

These reasons must include bona fide, demonstrable grounds for the company to consider dismissals, such as financial strain, restructuring for financial reasons or automation of production. Any reason cited must be provable, meaning that an employer citing financial strain as a reason for restructuring must be able to prove this through audited financial statements. The employer may be required to disclose otherwise confidential information during the consultation process as Section 189(4) enforces the access to information aspect of Section 16 of the LRA, regardless of whether a union is involved in the process.

2. Alternatives that the employer considered before proposing dismissals and the reasons for rejecting each of those alternatives:

This places a burden on the employer to demonstrate that dismissals weren’t the first option that they adopted, but that they investigated means of saving employees’ jobs through cutting costs elsewhere prior to engaging parties in this process. Such alternatives may include short-time, lay-offs, salary freezes, voluntary separation or any other alternative that the company considered. It is important to note that if the company wishes to propose any of these alternatives, they may do so through the Section 189 process and have employees agree to- or reject these alternatives and thereby give reason for the rejection of these alternatives.

3. The number of employees likely to be affected and the job categories in which they are employed:

This is an important exercise and, again, must be done in a justifiable way. The employer must demonstrate that the employees or job categories being eliminated were determined to be non-essential to the core operation of the business. The application of voluntary separation packages could also be used to reduce the number of employees to be affected.

4. The proposed method for selecting which employees to dismiss:

This is a very important aspect. Many employers wish to implement very specific selection criteria, however numerous judgements from the Labour Courts and Labour Appeals Court have found that these selection criteria are not fair. The only universally accepted fair criteria is that of LIFO (Last-In-First-Out), meaning that employees with shorter service must be the first to go. While in its’s simplest form this seems counter-intuitive in many cases where the specific skill sets of newer employees are more important to the company. This is easily addressed when one applies the selection criteria only within the identified job category and also when the company implements it along with skill-retention. As long as the company can prove that the employee being retained has a specific skill which another employee with possible longer service does not possess and that this skill is essential within the organization, the selection criteria will still remain fair. Another key point here is that any selection criteria agreed upon by the consulting parties must be considered as fair, since an employee choosing a selection criteria which includes him-/herself is effectively volunteering for retrenchment.

5. The time when, or period during which, the dismissals are likely to take effect:

While it will be tempting for many employers to consider an immediate date, there exist specific minimum consultation periods that must be adhered to. This is also one of the key differences between Sections 189 and 189A as the prescribed minimum consultation periods differ. Under Section 189 an employer is required to consult for a minimum of 30 days from the date of the Section 189(3) letter until the date on which they may give notice of dismissal, while a Section 189A process will require a minimum of 60 days, which may be extended at the request of any party for an additional 30 days. It must also be noted that the employer is still obliged to give notice of dismissal as required in terms of Section 37 of the Basic Conditions of Employment Act, 1997 to employees after the consultation process has been concluded.

6. The severance pay proposed:

This often becomes one of the sticking points in consultations as the law prescribes a minimum severance payment in terms of Section 41 of the BCEA which is defined as one week’s pay per year of completed service (This does depend on the employment sector as certain sectoral determinations and collective agreements stipulate higher severance payments). Since the law prescribes only a minimum payment, nothing prohibits parties from negotiating for higher severance packages and unions always attempt to gain additional monies in this manner as such payments are typically non-taxable. Another important consideration related to the payment of severance is that an employee may well waive entitlement to severance pay in terms of Section 41(4) of the BCEA if he/she unreasonably refuses an alternative that the employer may offer, such as relocation or a different position.

7. Any assistance that the employer proposes to offer to the employees likely to be affected:

This requirement lends itself to approaches where employers have the ability to engage with other employers in order to secure transfer of employment. If such an approach is adopted, the employer may well free itself from payment of severance, however, may then become jointly and severally liable for the continued employment of the employee with the new employer. This must always be approached within the guidelines of Section 197 of the LRA. Additionally, employees may request the employer to assist them with the payment for reskilling and training in other fields so that they may well be able to continue to provide for themselves. Such assistance must always be considered and formal responses tendered by the employer.

8. The possibility of future re-employment of the employees who are dismissed:

In cases where an employer implements dismissals due to a financial downturn, the employer will be well served to agree that employees will be re-employed once the business recovers, however in such a case the employer must remain mindful of only re-employing in accordance with fair procedures and precedence must always be given to former employees during the recall period. It is highly advisable that the employer ensures current contact details for employees to be dismissed if it intends to recall them later as well as ensuring that a reasonable recall period is agreed upon as an employee who is unfairly not recalled for employment may have a strong case of unfair dismissal as defined in Section 197(1)(d) of the LRA.

9. The number of employees employed by the employer.

10. The number of employees that the employer has dismissed based on its’ operational requirements over the preceding 12 months:

Here the requirement to disclose the number of employees becomes important as the aggregate number of dismissals may well shift a dismissal from a Section 189 process to a Section 189A process as outlined hereunder.

When does Section 189A Apply?

As indicated earlier, Section 189A (60 Days Consultation) would apply only to employers who employ more than 50 employees. There are also additional tests which determine whether an employer with more than 50 employees falls within the requirements of Section 189A. Section 189A applies to employers who employ:

1. 50 to 200 employees and are contemplating dismissing 10 or more employees for reasons of their operational requirements;
2. 201 to 300 employees and are contemplating dismissing 20 or more employees;
3. 301 to 400 employees and are contemplating dismissing 30 or more employees;
4. 401 to 500 employees and are contemplating dismissing 40 or more employees; or
5. More than 500 employees and are contemplating 50 or more employees.

What is important to remember here, however, is that when determining the total number of employees to be dismissed, the total number of employees dismissed for operational requirements over the preceding 12 months also count towards the total as stipulated in Section 189A(1)(b).

Additional procedure under Section 189A

Additional to the already mentioned difference in consultation periods, Section 189A also provides for a mechanism to allow the parties to approach the CCMA in order for the CCMA to appoint a facilitator to assist the consultations. If the company informs the other parties in the Section 189(3) invitation of its intention and then applies to the CCMA then a facilitator must be appointed by the CCMA. Additionally, should any other consulting party bring such an application to the CCMA within 14 days of receiving the Section 189(3) invitation, the CCMA must also appoint such a facilitator. In the event that neither party had invoked their right to request facilitation during the requisite periods, the parties may still, at any later date, agree to apply for facilitation. If a facilitator is appointed, the employer may only give notice of termination of employment after the facilitator has issued a certificate stating that the matter could not be resolved and/or agreed upon. Another key difference falls within the remedies available to the employees after the company gives notice of termination. While employees would ordinarily be allowed to refer a dispute to the CCMA in cases of alleged unfair dismissal, such remedy does not apply to employees dismissed in terms of a Section 189A process and the comparable remedy would be to approach the Labour Court for Adjudication or, alternatively, to give the employer notice to go on Strike. This distinction is important as employees who were given notice of termination for operational reasons may only exercise one of these rights, and in so doing, waive their entitlement to the other as set out in Section 189A(10).

Concluding the process

If no consensus has been found during the prescribed consultation processes, the employer may, only after exhausting the consultation process, give notice to employees. At this time, employees dismissed following an ordinary Section 189 process may approach the CCMA or Labour courts as per any other employee who feels that he/she has been unfairly dismissed. This is, however regulated by Section 191(12) of the LRA, which allows the employee to choose Arbitration or Adjudication only if:

1. The employee was the only employee consulted with.
2. The employee was the only employee who was dismissed.
3. The employer employs less than 10 employees in total.

Except in the above cases, an employee or group of employees dismissed for operational requirements may only refer a dispute to the CCMA for Conciliation and should he wish to take the case further, he/she must approach the Labour Court for relief.

Are Retrenchments worth the effort?

Having now discussed the onerous and complex procedure that must be adhered to when an employer contemplates dismissals for operational requirements, it is apparent that the decision to apply this mechanism should be well considered by any employer and only implemented as a measure of last resort. It remains extremely risky for an employer to approach this task without sound legal advice and strong HR backing.