Section 189 of the Labour Relations Act allows employers to retrench employees.
However, there are strict requirements that the employer has to follow before retrenching an employee. Before we get into the requirements that need to be followed, let us look at the 3 reasons that an employer can use to retrench.
There are only 3 reasons why an employer can retrench employees.
The employer must choose any one or more of the 3 reasons. This is called retrenchment based on operational requirements.
Basically that means that the employer has to retrench employees to continue operating his business.
The 3 reasons are:
1. for economic reasons;
2. for technological reasons; and
3. for structural reasons.
Here’s a general step-by-step guide for employers to reference when they need to embark on a retrenchment of employees:
Step 1:
Justify the Need for Retrenchment
Ensure that the decision to retrench is well-founded and justified. Common reasons for retrenchment include operational requirements, financial difficulties, or technological changes that make certain job roles redundant.
Step 2:
Consultation with Employees and Trade Unions
South African labour laws emphasize the importance of meaningful consultation with affected employees and trade unions, if applicable.
The employer must engage in a fair and transparent process, providing relevant information and exploring alternatives to retrenchment. The consultation should take place well in advance of any final decisions.
Important: As the employer, make sure that your criteria is not discriminatory or contrary to an entrenched constitutional right. For example, your criterial results in all females only being retrenched.
Retrenchment based on such criteria would be considered an automatic unfair dismissal, which would have serious legal repercussions for the company.
The safest route to take is careful discussion of dismissal criteria during consultations, and that employees understand.
Step 3:
Issuing a Section 189 Notice
Under the Labour Relations Act (LRA) of South Africa, employers must issue a formal written notice, known as a Section 189 notice, to the affected employees and relevant trade unions.
The notice should outline the reasons for retrenchment, the number of employees affected, and the proposed retrenchment date.
Step 4:
Employee Feedback and Consideration of Alternatives
During the consultation period, employees and trade unions have the opportunity to provide feedback, suggest alternatives, or negotiate retrenchment packages and severance pay.
Employers should consider these inputs seriously before proceeding.
Action Steps:
At the meeting, please discuss the items below. (Remember to make detailed written notes on the date and time and the responses):
- Explain the reason for the retrenchment and discuss why you are considering it.
- Explain the steps that you took to minimize the retrenchment
- Meaning what you have done to avoid retrenchment in the first place and that now this is a last resort for your business.
- Did you try placing the employees on short time?
- Did you decrease the salaries to save jobs?
- Did you reduce overheads?
- Ask the employee if they have any proposals to avoid the proposed retrenchment.
- Make a detailed note of their responses.
- Explore any appropriate measures to mitigate the effects of retrenchment
- Meaning what can you offer to the employees to make it easier for them during this difficult period?
- For example, this could include Letters of Recommendation, Certificates of Good Standing.
- Explain your method for selecting the employees to be retrenched.
- I.e. how did you select which employees where to be retrenched and which to stay. This has to be fair.
- What Severance Pay will you pay to the employees who are retrenched?
- The Law requires at least one week’s pay for every completed year of service that they have done with you.
- See our severance calculator as an example of how it is calculated here
- Discuss the Severance Pay you will be paying.
- The Possibility of any future re-employment.
A general rule, although it is not entrenched in a specific section of the LA, is that employers should consider a retrenched employee for a post if something comes up within six-months of the employees’ retrenchments.
- Get all parties to sign the minutes of the meeting.
Step 5:
Selection Criteria
If retrenchment is inevitable, the employer must develop fair and objective selection criteria for choosing which employees will be retrenched.
Which employees to select for retrenchment? Generally, most employers use the LIFO (last in first out) principle.
Common criteria include skills, qualifications, experience, and length of service. The process must be non-discriminatory and well-documented.
HAVE A SECOND MEETING WITH THE AFFECTED EMPLOYEES AFTER ALL ALTERNATIVES HAVE BEEN CONSIDERED:
At the meeting, please discuss the items below.
Remember to make detailed written notes on the date and time and the responses:
- Explain that you have considered the proposals made.
- Explain why those proposals will not work.
- Explain that you will be going ahead with the retrenchment.
- Get all parties to sign the minutes of the meeting.
Step 6:
Issue Notice of Termination
Provide written notice of termination to the affected employees, specifying the last working day and any applicable retrenchment benefits or severance packages. The notice period should comply with the employment contract or relevant legislation, whichever is longer.
Step 7:
Severance Pay and Retrenchment Packages
In South Africa, retrenched employees are generally entitled to severance pay, which should be calculated according to their length of service and remuneration.
How is a retrenchment package calculated
Section 35 (4) of the Basic Conditions of Employment Act states that if employees earn a basic salary plus commission and/or periodic incentive bonuses, the employer is required to calculate the employee’s average remuneration over the preceding 13 week period, and then use this average to calculate the severance pay.
In other words severance pay calculation must include:
- Basic salary
- Commission
- Incentive bonuses
The company must pay an employee who is to be dismissed severance pay equal to one week’s salary for every completed year of continuous service with the company.
So, for example, an employee who has worked for a company for four years would be entitled to four weeks’ salary.
In the situation where employees have worked for the company for less than a year, the amount of severance pay is at the discretion of the employer.
The payment of severance pay does not affect an employee’s right to any other amount of pay owing such as leave pay; notice pay or commission.
Additionally, some companies offer retrenchment packages that may include additional benefits.
Step 8:
UIF (Unemployment Insurance Fund)
Claims Advise retrenched employees about their eligibility for UIF benefits and assist them in the process of making a claim.
Step 9:
Maintain Employee Records:
Ensure that all necessary employee records and documentation related to the retrenchment process are accurately maintained for legal and audit purposes.
Step 10:
Compliance with Legislation:
Throughout the retrenchment process, employers must comply with all relevant labor legislation, such as the Labour Relations Act and any other relevant sector-specific regulations.
It is essential to emphasize that retrenchment should be considered as a last resort after exploring all other viable alternatives, and the process must be conducted in good faith and in compliance with the law.
Seeking guidance from legal and HR professionals is crucial to ensure a fair and lawful retrenchment process in South Africa.