There are a whole host of reasons why employers retrench. Whilst the most common reason will be some form of financial stress, the reason for retrenchment could be entirely unrelated to financial difficulty.
It could be said that employers either retrench to lose less money, or retrench to make more money. Other grounds warranting retrenchment include automation, which replaces manual jobs, and simple organizational restructuring whereby the employer concludes that the business could continue to function, and even flourish.
It’s also important to remember that retrenchment, referred to as an operational requirements dismissal in the Labour Relations Act, is one of the three categories of dismissal in our law, with the other two being misconduct and incapacity.
It is helpful to understand there are, essentially, three steps to be followed in order to ensure compliance with the procedure to be followed, as outlined in sections 189 and 189A in the Labour Relations Act.
In short the three steps are (1) notify the employee the proposed retrenchment in writing, (2) consult with the employee before finalising any retrenchment decision, and (3) finalise the procedure by deciding if the retrenchment will be confirmed as proposed.
So when must the requirements of section 189 of the Labour Relations Act commence? Well, quite simply, an employer must issue a potential retrenchee a notice of proposed retrenchment once the retrenchment is contemplated by the employer. In practice, this means that the process must commence once the retrenchment is the most likely, or most preferred, employer option.
Employees are entitled to be represented during the consultation process by any registered trade union whose members are likely to be affected by the proposed retrenchments, a committee appointed to represent potential retrenchees, or a colleague.
Both the employer and the potential retrenchee are equally obligated to participate in the consultation process with a view to attempting to seek consensus on possible ways of avoiding the proposed retrenchment, delay the timing of the proposed retrenchment, or ways to mitigate the adverse effects of the retrenchment.
In addition, and importantly, the employer and the employee must also attempt to seek consensus on the selection criteria to be adopted in the selection of the employees to be dismissed. If no agreement is reached on the selection criteria, fair and objective criteria should be adopted. This means, for example, that subjective criteria such as the employee’s disciplinary records, cannot be used to select employees for retrenchment. This is an important compliance issue, as was held in Singh v Mondi Paper (2000) 4 BLLR 446 “the selection process must rank as the most fundamental issue for scrutiny in order to determine whether the dismissal was fair or not”.
‘Last in first out’ is the most widely recognised fair and objective selection criterion in retrenchment. However, selection may be based on the need for skills retention, in which case last in first out not a consideration.
The severance pay to be paid to potential retrenchees is also a matter for consultation. Employers are required to pay no less than one week’s remuneration for each completed year of service, to a retrenched employee. You can pay more, but you can’t pay less, without an exemption to do so.
It is not uncommon for employers to agree to pay retrenchees in excess of the one week’s remuneration for each completed year of service; however, an employer would typically not do so without ensuring, in return, that the employee agrees to sign a retrenchment agreement, thereby ensuring that the employee cannot subsequently claim unfair retrenchment.
Another factor to consider in most retrenchment scenarios, is the prospect of voluntary retrenchment. Prior to selecting employees for potential retrenchment, an employer may open a window period within which employees may volunteer to be retrenched. It may sound unlikely that an employee would volunteer to be retrenched. However, it does occur. For example, an employee may have been planning to resign, or has been saving to start their own business venture, in which case the severance pay will come in handy.
When such a window period for voluntary retrenchments is opened, the employer would always reserve their right to accept, or reject, applications, based on operational requirements, and the need to retain certain skills.
Finally, section 189A of the Labour Relations Act is to be complied with in the case of more large scale retrenchments, and becomes applicable, in certain circumstances, in retrenchments with employers with more than fifty employees.