Basic guide to retrenchments

The new minimum wage for farm workers came into effect on 1 March. While most farmers will do their utmost to hold onto their current workforce, some will have no option but to retrench. Industrial relations expert Grant Hollins explains the do’s and don’ts of retrenching staff.

Basic guide to retrenchments
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The recent wage increase which came into effect on 1 March means that farmers will have to consider various strategies to mitigate the impact of the increase. Consideration will certainly be given to retrenchment, the proceedings of which are outlined in Section 189 of the Labour Relations Act (Act 66 of 1995 as amended). Failure to follow correct procedure when terminating employees’ contracts of employment, due to operational requirements, can result in penalties for employers, including being required to pay up to 12 months’ salary to dismissed employees by way of compensation.

It is important for employers to understand the process to ensure that dismissals are substantively (concrete reason) and procedurally fair. This step by step guide will give readers a basic understanding of the requirements of Section 189, but employers are advised to contract the services of an industrial relations consultant to facilitate the process. Experts have a greater understanding of the intricacies of successfully completing a procedurally and substantively fair retrenchment.

Step 1
Determine whether the retrenchment is necessary and if so, on what grounds you would retrench.
Section 213 of the Labour Relations Act (LRA) defines operational requirements as “requirements based on the economic, technological, structural or similar needs of an employer.” While this sounds straightforward enough, the issue of what constitutes ‘economic’, ‘technological’ and ‘structural needs’ often causes confusion and may lead to difficulty in determining substantive grounds for employee terminations based on operational requirements. (See ‘Economic reasons for retrenchment’)

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It is important to remember that the onus is on the employer to prove the dismissals were both procedurally and substantively fair. This means that the employer needs to provide evidence to prove that retrenchments occurred for the reasons stated. For example, if a farmer retrenched employees claiming that his enterprise was not profitable, he would have to prove this by providing financial records, if the process was challenged after completion or during consultation.

Step 2
Determine with whom you are required to consult.
Section 189 (1) prescribes that an employer must consult with any person as required by a collective agreement in effect, or if there is no collective agreement, a workplace forum, if one exists in the business, or any trade union whose members are likely to be affected by proposed dismissals.

The trade union does not need to have the majority of employees in the workplace as members, or need to be sufficiently representative, but must be a registered trade union. If there are no trade union members or workplace forum, the employer is required to consult directly with employees who are likely to be affected by proposed dismissals, or their nominated representatives.

Section 189 (2) of the LRA requires that consultation between the parties occurs in the form of a joint consensus. They must endeavour to reach agreement on appropriate measures to avoid the dismissals, minimise the number of dismissals, alter the timing of dismissals and mitigate the adverse effects of the dismissals.

The section also specifies that there should be consensus over severance pay for dismissed employees, and the method of selecting employees to be retrenched. Both parties must try to reach consensus, but there is no stipulation that consensus must be attained. The employer should record any reasons for the rejection of representations made by employees.

Step 3
Plan, draft and issue the written notice of intention to retrench required in terms of Section 189 (3) of the LRA.
Section 189 (3) of the LRA deals with the issue of consultation and requires the employer to issue employees with a notice of intention to retrench. This notice must contain specific, prescribed information, but can include further information relevant to the process.

This is an extremely important step as the written notice of intention to retrench contains all relevant information to the consultation process and is one of the first documents a CCMA (Commission for Conciliation, Mediation and Arbitration) commissioner or Labour Court judge may request when considering the validity of a completed retrenchment should it be challenged.

Failure to issue a notice of intention to retrench would mean that the retrenchment process was procedurally defective and could result in employer penalties. Until the consultation process has been concluded, the retrenchment is merely anticipated and is not a foregone conclusion. The notice of intention to retrench should reflect this in its terminology, by referring to the retrenchment as a proposed solution rather than an established fact.

The 10 items of information that must be included in this notice are:

  1. The reasons for the proposed dismissals: This refers to Step 1 regarding the decision to embark upon retrenchment.  The requirement to indicate these reasons in writing formalises the reasons listed and would form the basis of the information the employer is required to produce in order to prove the legitimacy of the reasons to retrench.
  2. Alternatives the employer considered before proposing the dismissals, and the reasons for rejecting each of those alternatives: The employer should show the alternatives to retrenchment that were considered prior to embarking upon the process as outlined in Section 189. Employers should also indicate reasons why these alternatives were rejected. In other words, was the decision to retrench a last resort? 
  3. The number of employees likely to be affected and the job categories in which they are employed: This item indicates how many employees are anticipated by management to be selected for retrenchment, should the retrenchment occur and in conjunction with items 9 and 10 (overleaf) can be used to determine whether the employer should be following the process as outlined in Section 189 A of the LRA.
  4. The proposed method for selecting which employees to dismiss: This indicates the employer’s proposed selection criteria. It is important to note that the LRA stipulates in Section 189 (7) that selection criteria agreed to during the consultation process should be used. However, if no agreement was reached in this regard, fair and objective selection criteria must be used. It is generally accepted that the LIFO (Last In, First Out) principle is fair and objective and it is often used in conjunction with the need for retention of skills in the business.
  5. The time when, or the period during which, the dismissals are likely to take effect: This indicates the timing of the proposed dismissals and informs the parties to the consultation of the proposed time frame for conclusion of retrenchment. 
  6. The severance pay proposed: The employer needs to indicate the intended severance pay, should the retrenchment take place. In terms of Section 41 (2) of the Basic Conditions of Employment Act (BCEA) (Act 75 of 1997 as amended) employees are entitled to one week’s pay for every completed year of service. For example, if an employee has worked for the organisation for a period of three years and six months, they would be entitled to three weeks’ payment as severance pay. Note that bargaining council collective agreements may prescribe different rates for calculating severance pay, which would take precedence over the rates outlined in the BCEA. In terms of Section 41 (4) of the BCEA, an employer is not required to pay severance pay should the employee unreasonably refuse to accept employment with the current or another employer. Employers are advised to consult with an industrial relations specialist prior to implementing the provisions of this section. The issue of what constitutes a reasonable offer of employment is often a contentious one. 
  7. Assistance the employer proposes to offer to employees likely to be dismissed: This refers to any additional assistance the employer offers employees likely to be dismissed. It often includes letters from the employer to insurance companies confirming the employee’s retrenchment, time off from work during notice periods in order to attend job interviews or assistance in applying for UIF. 
  8. The possibility of future re-employment of the employees who are dismissed: If the circumstances which led to the retrenchment change, the employer should indicate how employees whose services were terminated due to operational requirements would be re-employed. Retrenchment is not a process to be used to terminate the employment of undesirable workers, but should be used, as a last resort, to address the specific needs of the organisation. 
  9. The number of employees employed; and 
  10. The number of employees dismissed for reasons based on operational requirements in the preceding 12 months:  These last two items are used to test whether the retrenchment process should be conducted in terms of Section 189 A of the LRA. The process as outlined in this section is a more regulated process designed for larger employers, has prescribed time frames and allows employees the right to strike against the proposed retrenchments.

Step 4
The consultation must be completed before any dismissals, due to operational requirements, can take place. It is advisable to take minutes and to keep an attendance register. The issues mentioned in the notice of intention to retrench need to be discussed, as well as any other matters relevant to the retrenchment process. Section 189 (4) advises that Section 16, dealing with the disclosure of information, also applies to the consultations. This means that employee representatives are entitled to information enabling them to perform their duties.

If an employer has cited the reason for proposed retrenchment is because the company is running at a loss, the employer would have to supply the trade union or employee representatives with evidence to support this claim. If the information to be supplied is confidential, the employer must notify the union or employee representatives of this fact in writing.

Section 189 (5) prescribes that the employer must allow the other consulting party an opportunity, during consultation, to make any representations on issues dealt with in Sections 189 (2), (3), (4) or any other matter related to the proposed dismissals. Section 189 (6) also requires the employer to respond to all representations made. If an employer rejects any representation, reasons must be provided for the rejections. If the other consulting party has made these representations in writing, the employer must respond in writing as well.

Step 5
Once the consultation process has been concluded and all requirements of Section 189 or 189 A of the LRA have been satisfied, the employer can conclude the process in terms of the provisions reached during the consultation. Generally, the employer would issue a notice of dismissal in terms of operational requirements and provide all payments required. The employer must ensure that commitments made during consultations are honoured, especially in terms of payment, timing or assistance. Dismissing employees for reasons based on operational requirements is a complex process. It is a good idea to retain the services of a labour expert.

View the Labour Relations Act (Act 66 of 1995 as amended), the Basic Conditions of Employment Act (Act 75 of 1997 as amended) and the Farm Worker Sector of Sectoral Determinination 13.

Contact Grant Hollins on 083 459 5653 or at [email protected]