Economic reasons for retrenchment

Economic – The immediate inference one might make regarding economic reasons for a retrenchment is that the business is suffering losses and needs to cut costs by reducing the number of employees.

- Advertisement -

However, the term refers to much more than just this. Economic reasons include reducing cost, increasing profits and changing business requirements. In one of the first major Labour Appeal Court cases dealing with the issue of economic reasons for retrenchment, Kotze v Rebel Discount Liquor Group (Pty) Ltd (2000) 21 ILJ 129 (LAC), the court held that it did not have jurisdiction to determine whether or not the employer had made the best decision by choosing to retrench, but could only evaluate whether the reasons were based on a valid business rationale.

The concept that a prosperous business may retrench in order to make more profit was supported in the judgment of the Labour Appeal Court in General Food Industries Ltd v Food & Allied Workers Union (2004) 25 ILJ 1260 (LAC) where the court held: “The act recognises an employer’s right to dismiss for a reason based on its operational requirements without making any distinction in the context of a business the survival of which is under threat and a business which is making profit and wants to make more profit.”

The introduction of increased mechanisation often results in an organisation making existing positions redundant, needing more skilled employees or restructuring working terms and conditions. Findings in the General Food Industries Ltd v Food & Allied Workers Union (supra) case provide a concise description of what constitutes technological requirements as grounds for retrenchment. “Technological requirements refer to the introduction of new technology which affects work relationships by making existing jobs redundant or by requiring employees to adapt to the new technology or a consequential restructuring of the workplace.”


The General Food Industries Ltd v Food & Allied Workers Union (supra) case, also supplies a clear indication as to what constitutes structural reasons for retrenchment. “Structural reasons are reasons that relate to the redundancy of posts consequent to a restructuring of the employer’s enterprise.”

- Advertisement -

Employers often restructure positions within their organisation or alter the terms and conditions of employment usually to increase efficiency. An employer may not unilaterally alter an employee’s terms and conditions of employment. Employees have the option to refuse to accept the new terms and conditions and as such could make themselves eligible for retrenchment as the position they had held would have been made redundant through the restructuring.