Retrenchment in terms of S189A of the LRA

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How to consult and end the employment relationship in a fair manner based on operational requirements (retrenchment)

1. CONSIDER available external support to minimise the need for retrenchment.

 

1. Temporary Employer/Employee Relief Scheme (TERS) is a 12-month solution which serves to benefit employers and their employees facing business distress.
2. Under the TERS, employees affected by short-time / layoffs / possible retrenchment may be placed on SETA-funded training for up-skilling / re-skilling for a maximum of 12 months and during this period their wage cost is covered by the UIF and not by the employer.
3.  All requests to participate in the TERS must be made via the CCMA, on the TERS Application Form and submitted to the CCMA. TERSapplication@ccma.org.za
4. Productivity South Africa (Productivity SA) offers various services, including the Business Turnaround and Recovery programme, designed to effectively solve business challenges and assist distressed organisations, to take practical steps to successfully revive and restore themselves to functional, profitable enterprises. For more information, visit: https://productivitysa.co.za/turnaroundsolutions

 

2. CHECK who should be engaged in the consultation process.

 

1. Is there a collective agreement that applies? If so, an employer must check who should be consulted in terms of the agreement.
2. If not, is there a workplace forum in place at the workplace? If there is, an employer must consult with the workplace forum as well as any registered trade union whose members are likely to be affected by the proposed retrenchments.
3. If there is no workplace forum, is there a registered trade union whose members are likely to be affected? If there is, an employer must consult with the trade union.
4. If there is no trade union at the workplace, an employer must consult with the employees likely to be affected or any representatives they may nominate for this purpose.

 

3. ISSUE the invitation to consult letter:

 

1. Send the letter of invitation to consult, as per section 189(3) of the Labour Relations Act 66 of 1995 (LRA), to the appropriate party as determined above.
   Invitation to consult: Trade union
   
   
   Invitation to consult: Individual
2. Ensure that the letter adequately explains the reasons for the proposed retrenchments.
3. Ensure that the following issues are covered in the letter:
   1. The proposed number of employees likely to be retrenched in each job category;
   2. The alternatives considered before proposing retrenchment and the reasons for rejecting these;
   3. The proposed timing of the retrenchments;
   4. The proposed selection criteria;
   5. The proposed severance pay (the Basic Conditions of Employment Act 75 of 1997 prescribes a minimum of one week’s pay per completed year of continuous service. This offer could possibly be enhanced during the consultation process);
   6. The proposed assistance to be offered to the retrenched employees;
   7. The possibility of future re-employment;
   8. The number of employees employed (prior to retrenchments); and
   9. The number of employees retrenched in the last 12 months.
4. Set a date for the first consultation meeting (as a guideline, a reasonable notice period would be a minimum of 2 days, up to a week).

 

4. CONVENE the first consultation meeting:

 

1. Allow employees / representatives to make proposals / representations on any of the issues set out in the letter, as well as any other matter relating to the proposed retrenchment/s.
2. Listen to and note the proposals. Do not respond immediately.
3. Ensure that employees / representatives have a full opportunity to air their views.
4. Set a date for a follow-up meeting, at which you will respond to the proposals.
5. After the first meeting, consider all the proposals/representations that employees or their representatives have made.

 

5. HOLD the second consultation meeting:

 

1. Respond to the employees’ proposals / representations.
2. If proposals have been made in writing, the employer must respond in writing.
3. Try to meet the employee(s)’ proposals as far as practically possible as this will help to demonstrate the employer’s willingness to engage in a consensus-seeking process. If possible, offer other options to try to reach agreement (e.g. additional severance pay, no requirement to work out notice period, )
4. Where the employer does not agree with any of the proposals/representations that have been made, the employer must give reasons for disagreeing.
5. Try to reach agreement on the details of the retrenchments (who will be retrenched, timing, severance pay, etc.)
6. If it is necessary to hold a further meeting, set a date for the final consultation meeting.
7. Conduct the final consultation meeting in the same way as the first consultation. Try to reach agreement on all aspects of the retrenchment.

 

6. FINALISE the retrenchment:

 

1. If agreement has been reached, draft a settlement agreement to be signed by the trade union (if any) or by the individual employees. The agreement must reflect that it is in full and final settlement of all disputes relating to the employment of the employee(s) and the termination thereof.
   
   Retrenchment Agreement
2. If no agreement is reached, issue notice of termination letters to the employees to be retrenched.
3. Check that the appropriate notice period has been given to each employee in terms of the contract of employment. If there is no provision in the contract of employment, use the periods set out in the Basic Conditions of Employment Act:
   1. One week if the employee has been employed for six months or less;
   2. Two weeks if employed for more than six months, but not more than one year;
   3. Four weeks if employed for more than one year or if the employee is a farm worker or a domestic worker who has been employed for more than six months.
4. Pay each employee a severance package of no less than one week’s remuneration per completed year of continuous service, together with and in addition to payment owing in respect of accrued leave, the final wage / salary payment, and any other amount owing by law or in terms of the employment contract.
   
   What is severance pay
5. Provide the employee with a certificate of service and a letter of reference.
6. Furnish the employee with an unemployment insurance UI-19 form recording the reason for termination as “retrenchment”.
7. If applicable, arrange for the employee to withdraw from the company provident fund and for the payment of all monies due to the employee.
8. Ensure that these documents are processed and completed as expeditiously as possible.
   

   See template: Unemployment Insurance Form UI-19
   
   
   Certificate of service

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How to consult and end employment due to operational requirements

Retrenchment Agreement

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How to end the employment relationship in a fair manner where the employer needs to reduce the number of employees it employs based on its operational requirements, commonly known as “retrenchment”.

 

 

Operational requirements include requirements based on the employer’s economic (financial), technological, structural, or similar requirements.

The law places certain duties on all employers that are considering retrenching one or more of its employees. Before taking any decision to retrench, the employer is required to consult with the relevant parties. The consulting parties could include a workplace forum, registered trade union (where employees likely to be affected are members of the union) and the employees likely to be affected. Consultation requires joint meaningful engagement in an attempt to reach consensus.[/vc_column_text][vc_column_text]

[/vc_column_text][vc_column_text]Consultation sessions may result in an agreement between the consulting parties but this is not always the outcome. Employers must ensure that the process followed is fair and the underlying reasons for the retrenchment can be justified under the circumstances.

 

What happens when a retrenchment agreement is concluded?

 

If the consulting parties agree on the selection criteria for retrenchment and the terms of the retrenchment, an agreement should be drawn up and signed. This approach is advised as it reduces the likelihood of an employee successfully challenging the fairness of the dismissal at the CCMA, a bargaining council or the Labour Court.[/vc_column_text][vc_column_text]

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What happens where no consensus is reached after consulting?

 

In the case of small-scale retrenchments, when the consultation process has concluded without reaching an agreement, the employer may proceed with the retrenchment by providing written notice to the affected employees.

 

The notice period is determined with reference to the employee’s employment contract, provided that the notice period is not less than the notice period as per the Basic Conditions of Employment Act 75 of 1997 as amended (“BCEA”) or any relevant bargaining council collective agreement. Where the employment contract does not specify the notice period then the BCEA or relevant bargaining council collective agreement applies.

 

The employer can choose between requiring employees to work during the notice period or requiring them to leave immediately and paying them for the notice period.

 

Each employee should be paid a severance package of no less than one week’s remuneration per completed year of continuous service, in addition to payment owing in respect of accrued leave, the final wage/salary payment, and any other amount owing by law or in terms of the employment contract. It is important to note that certain bargaining council’s collective agreement might prescribe severance pay which is greater than one week’s remuneration per completed year of service and employers must comply with this if applicable.

 

An employee who unreasonably refuses to accept the employer’s offer of alternate employment with that employer or any other employer, is not entitled severance pay.

 

The employer should provide the employee with a Certificate of Service.[/vc_column_text][vc_column_text]

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When will a retrenchment be fair?

 

In terms of our law, for a retrenchment to be fair, two requirements must be satisfied:

• The employer must have a fair reason for retrenching an employee; and
• The employer must also follow a fair procedure when carrying out the retrenchment.

 

What is a fair reason for retrenchment?

 

As a guideline, the following questions should be asked in order to determine whether there is a valid reason to retrench employees:

• Was the retrenchment a result of the employer’s economic, technological, structural or similar needs?
• Was the retrenchment operationally justifiable?
• Was there a proper consideration of alternatives to retrenchment and a good reason not to implement any alternatives?
• Were the selection criteria fair and objective?

 

For the reason for the retrenchment to be fair, the answer to all the questions above should be “yes”.

 

What is a fair procedure to follow during the retrenchment process?

 

The requirements for the retrenchment procedure to be fair are as follows:

• The employer must invite the consulting party/parties, in writing, to consult with it and disclose the required information including the reasons for proposing retrenchment, alternatives considered, number of affected employees, proposed severance pay, selection criteria, proposed assistance for any retrenched employees and the possibility of re-employment for employees who may be retrenched. The employer must disclose the number of employees in its employ as well as the number of employees retrenched in the past 12 months.
• The employer must provide an opportunity for a meaningful joint consultation process before employees are retrenched. This includes attempting to reach consensus over a number of issues including appropriate measures to avoid or reduce the number of retrenchments, the timing of the retrenchments, selection criteria and the severance pay.
• The employer must disclose information that is relevant to the proposed retrenchments.
• The employer must allow consulting parties to make representations and proposals.
• The employer must consider and respond to the representations and proposals. If such representations or proposals are made in writing the employer must respond in writing.
• The employer must select employees to be retrenched according to fair and objective criteria, or criteria that the consulting parties have agreed upon. The selection criteria commonly used and which the courts have found to be fair is “LIFO”- last in, first out, in other words the employees with the shortest service will be the ones selected for retrenchment. However, this is just a guide and consideration should be given to the operational needs of the organisation and the need to avoid acts of unfair discrimination.

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How to end employment fairly by retrenchment

Invitation to consult: Individual

Invitation to consult: Trade union

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What is the nature and purpose of severance pay?

 

• Retrenchment is a “no-fault” type of dismissal arising from the economic, technological, structural or other similar needs of the employer rather than the conduct or performance of the employee. It is therefore fair that the employer compensates the employee for the loss of employment.
• Severance pay can be described as “bridging finance” to assist a retrenched employee while seeking alternative work.
• Severance pay is linked to an employee’s rate of remuneration and length of service.
• Section 41 of the Basic Conditions of Employment Act 75 of 1997 (BCEA) prescribes that the minimum amount of severance pay that an employer is obliged to pay is the equivalent of one week’s remuneration for each completed year of continuous service.
• An employer may agree to increase it to two weeks or three weeks’ severance pay. Such an agreement is often found in a collective agreement, contract of employment, or may be agreed between the consulting parties during the retrenchment consultation process.

 

Entitlement to severance pay

 

• Every retrenched employee has a right to be paid severance pay by the employer if s/he has completed at least one year of continuous service with the employer prior to retrenchment.
• An employee who unreasonably refuses an offer of alternative work by the employer instead of retrenchment, loses his/her entitlement to claim severance pay.
• The BCEA also permits an employee who had a break in service of less than 12 months with the same employer, to claim severance pay including the years of service before the break. The claim is good as long as the break was not longer than 12 months and provided the employee has not already received severance pay for the period of service before the break.
• Employees cannot insist that they be retrenched to claim severance pay if the employer offers them reasonable alternative jobs to avoid their retrenchment. Similarly, employees who accept alternative employment cannot claim severance pay on the basis that the new position is less favourable than the previous one.

 

Entitlement to payment on the expiry of a fixed-term contract contemplated by section 198B(4)(d) of the Labour Relations Act exceeding 24 months where the employer employs 10 or more employees

 

• Section 198B of the Labour Relations Act 66 of 1996 (LRA) provides that an employee that earns below the threshold as set out in section 6 of the BCEA, employed on a fixed-term contract on a specific project for a period exceeding 24 months, depending on the terms of any applicable collective agreement, will be entitled to severance pay in an amount equal to at least 1 week’s remuneration for each completed year of continuous service on expiry of the fixed-term contract.
• Employees will not be entitled to any severance pay should the employer offer or secure reasonable alternative employment with a different employer, before the expiry date of the fixed-term contracts, if that new employment commences at the expiry date of the contracts and is on the same or similar terms.
• Should a collective agreement provide that employees employed on fixed-term contracts for more than 24 months will not be entitled to any severance pay, such clause will supersede the provisions of section 198B of the LRA.

 

What is remuneration?

 

• The BCEA uses the word “remuneration”, not pay, wage or salary because the payment is more than simply the normal take-home wage of an employee.
• The Minister of Employment and Labour has defined the word “remuneration” for the purpose of calculating leave pay, notice pay and severance pay.
• The definition includes the value of any benefits the employee received, such as accommodation, payments in kind – g. free canteen lunches, the employer’s contribution to any medical aid, pension, provident fund, death or funeral benefit schemes or similar schemes, shift allowances, car allowances, but excludes any payment to enable the employee to travel to and from work, relocation allowances, tips, gifts, entertainment allowances or education/schooling allowances, etc.

 

How is severance pay calculated?

 

• The one week’s severance pay per completed year of continuous service is the minimum amount the employer must pay by law. This is based on the gross (before tax) remuneration of the employee.
• To calculate one week’s remuneration, the following formula is applied: monthly remuneration divided by 4.33 equals the weekly remuneration.
• Where an employee’s remuneration or wage changes significantly from time to time, such as when an employee earns commission, payment to that employee must be calculated by reference to the remuneration received during the preceding 13 weeks (section 35(4)(a) of the BCEA).
• Special tax rates apply to severance benefits (see sars.gov.za). To qualify for this, the employer must apply to the South African Revenue Services (SARS) for a tax directive before the severance benefit is paid to the employee.

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What is severance pay

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How to manage the employment relationship where the employer needs to reduce the number of employees it employs for operational, financial or technological reasons (retrenchment)

 

Restructuring of a business, for whatever reason, can be a traumatic experience for employers and employees alike. When employees lose their jobs through no fault of their own through retrenchments, it is not only they that are affected, but the other employees who are not retrenched (“survivors”) as well. The direct financial cost and indirect morale and adjustment costs to employers in retrenching staff can also be significant.

 

This trauma can be minimised if employers:

• transparently, sensitively and proactively communicate with employees – the sooner that employees are made aware of the possibility of retrenchment, the better;
• make affected employees aware of their rights and obligations- employers are well-advised to be honest and open and disclose information as far as possible;
• follow best practice procedures when faced with any of these issues Follow the guidelines contained in the Code of Good Practice On Dismissal Based On Operational Requirements;
• ensure that retrenchment is the last resort.

 

What is retrenchment?

 

Apart from the dismissal of an employee for misconduct or for incapacity, an employer may dismiss employees for reasons based on the employer’s operational requirements. This is the technical term for a “no fault dismissal”, and what is generally referred to as retrenchment.

 

“Operational requirements” means requirements based on economic, technological, structural or similar needs of an employer. These factors affect the ability of a business to continue operating at a profit.  The Code of Good Practice on Dismissal based on Operational Requirements explains these terms:

 

• Economic reasons are those that relate to the financial management of the enterprise. For example, when the high cost of manufacturing reduces the financial viability of a business.
• Technological reasons refer to the introduction of new technology that affects the work relationship either by making existing jobs redundant or by requiring employees to adapt to the new technology or a consequential restructuring of the workplace. For example, an automated payment system in a parking garage.
• Structural reasons relate to the redundancy of posts as a consequence of restructuring the employer’s business. A merger between two businesses is an example of a structural reason.

 

Small-scale and large-scale retrenchments

 

There is a difference in the law applicable to small-scale and large-scale retrenchments. A large-scale retrenchment occurs when an employer employs more than 50 people and retrenches a certain number of people over a 12-month period. It is regulated by section 189A of the Labour Relations Act 66 of 1995 (the LRA).[/vc_column_text][vc_column_text]

[/vc_column_text][vc_column_text]In this guide we will only be dealing with the law relating to small-scale retrenchments; in other words, where an employer employs less than 50 employees.[/vc_column_text][vc_column_text] [/vc_column_text][vc_column_text]

Checks and balances

 

The LRA places checks and balances on both the employer’s reason to retrench and the way in which it goes about the retrenchment to ensure that the employee is treated fairly. In this way the law is designed to ensure that an employer does not resort to retrenchment if it can possibly be avoided.

 

The law places certain duties on all employers that are considering the retrenchment of one or more employees. Before taking any decision to retrench, the employer is required to consult with employees. Consultation requires joint meaningful engagement in an attempt to reach agreement. The employer must listen and respond to the input of the employee, but has the discretion to make the final decision.

 

Who must the employer consult with?

 

The employer is required to consult with employees, either directly or via an employee representative body. If there is a collective agreement specifying any person the employer must consult with, the employer must comply with this. If there is no collective agreement regulating consultation, the employer must consult with:

 

• A Workplace Forum (if such a body has been established) as well as any registered trade union whose members are likely to be affected by the proposed dismissals
• If there is no Workplace Forum, the employer must consult with any registered trade union whose members are likely to be affected.
• If there is no registered trade union representing employees, the employer must consult directly with the employees concerned or their nominated representatives.
• If some of the employees are represented by a trade union and others are not, an employer must consult with both the trade union, and the unrepresented employees, or their nominated representatives.

 

The consultation process

 

The LRA describes consultation as a “joint consensus-seeking process”. The consultation process must start as soon as the possibility of retrenchment is contemplated.

The purpose of consultation is to try to reach consensus on appropriate ways-

• to avoid the dismissals;
• to minimise the number of dismissals;
• to change the timing of the dismissals;
• to mitigate the adverse effects of the dismissals;
• to determine the method for selecting those to be retrenched;
• to determine the amount of severance pay to be paid to dismissed employees.

 

The process begins with a written Invitation to Consult, which must set out the information required by section 189(3) of the LRA.[/vc_column_text][vc_column_text]

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Relevant information for a meaningful consultation process

 

In order to allow for meaningful consultation, the LRA requires that the employer makes a written disclosure of relevant information, including, but not limited to, the reasons for the retrenchment, alternatives to retrenchment that have been considered, the possibility of future re-employment, and the provision of any other reasonable assistance to employees who are to be retrenched such as time off to find alternative work; the proposed method for selecting which employees to retrench;  the period during which the dismissals are likely to take place; and the severance pay proposed. If the reason for retrenchment is financial hardship, the employer should be prepared to disclose financial information to support this.

 

The employer is also required to disclose how many people it employs, and how many have been retrenched in the last twelve months, since these figures (together with the number now contemplated) will determine whether the retrenchment is a large-scale or small-scale one.

 

Consultation meeting

 

The submission of the invitation to consult is followed by a consultation meeting, where the employees and/or their representatives can make proposals to avoid retrenchment or to mitigate the effect of the retrenchments. If the employer does not agree with the proposals made by the employees, it must give reasons. If the employees’ proposals are made in writing, the employer must respond in writing. It may be necessary to hold several consultation meetings in order to allow for proper discussion of all of the issues.

 

Reasonable alternatives to avoid retrenchment

 

Alternatives to avoid retrenchment may take a variety of forms. For example, it may be possible for the employer to arrange job sharing, short time, or make an arrangement for the employee to take unpaid leave for educational purposes.

Employers who are facing financial distress are encouraged to adopt preventative measures by, for example, engaging the services of Productivity South Africa (PSA). PSA’s services include “Business Turnaround & Recovery Programme”, an intervention that delivers turnaround and contingency plans for businesses that are facing financial ruin, job loss and business sustainability challenges.

 

 

 

PSA also offers an “Enterprise Competitiveness and Sustainability Programme” that serves, amongst other, to identify ways for businesses of all sizes to increase productivity, increase profitability by reducing costs and improving resource utilisation, and to enhance the efficient use of resources.

 

 

 

In addition, employers who are facing business distress are encouraged to contact the CCMA to determine whether they comply with the requirements of the Temporary Employer/Employee Relief Scheme (TERS). This is not to be confused with the Covid-19 TERS that operated for part of 2020 and in response to business distress caused by the Covid-19 lockdown.

 

 

 

 

Selection criteria

 

One of the more contentious areas for consultation is the selection criteria or – the method of selecting those to be retrenched. Employers will often want to retrench those that they regard as being less productive or poor performers, but this is not advisable. Retrenchment is a no- fault dismissal and should not be used as an excuse for employers to rid themselves of those they subjectively regard as “dead wood”. The criteria for selecting those to be retrenched must be fair and objective. A criterion which is often used and is widely accepted as being fair is “Last In, First Out” (“LIFO”) – in other words, those with the shortest service will be selected first for retrenchment. This can be applied per job category and provision can also be made for the retention of scarce skills. Other criteria that may be used are experience, skills and capability. It is always important to take into account the impact of selection on employment equity and transformation. Criteria may not include any which could amount unfair to discrimination e.g. pregnancy, race etc.

 

What is Severance Pay?

 

Severance Pay is a statutory entitlement in terms of the Basic Conditions of Employment Act No. 75 of 1997, as amended (BCEA), which an employee is entitled to upon retrenchment. It should not be confused with “service pay” which is not recognised by the law but refers to a gratuitous payment or gift that an employer may present to an employee for long service according to the employer’s discretion, policy or in terms of a contract.

The minimum amount of severance pay in terms of the Basic Conditions of Employment Act 75 of 1997 (BCEA) is one week’s remuneration per completed year of continuous service, but employees are free to try to negotiate more than this. Note that “remuneration” includes, but is not limited to, the value of any benefits the employee received, such as accommodation, payments in kind e.g. free canteen lunches, the employer’s contribution to any medical aid, pension, provident fund, death or funeral benefit schemes or similar schemes, shift allowances and car allowances (for work purposes). The law does not recognise pro rata severance pay for incomplete years of service, but again this may be negotiated between the employer and employees.

Although, every employee who has completed at least one year of continuous service with the employer is entitled to be paid severance pay if retrenched, an employee who unreasonably refuses an offer of alternative work by the employer (either with the same employer or with a different employer) instead of retrenchment, loses his/her entitlement to claim severance pay.

Employees cannot insist that they be retrenched to claim severance pay if the employer offers them reasonable alternative jobs to avoid their retrenchment. Similarly, employees who accept alternative employment cannot claim severance pay on the basis that the new position is less favourable than the previous one.[/vc_column_text][vc_column_text]

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Conclusion of the consultation process.

 

The consultation process may result in an agreement being reached with some or all of the employees, or in the worst case scenario, no agreement being reached at all. In either case the employer may then start to give formal notice to those who are affected by the retrenchments. Where no agreement has been reached the employees may then exercise their rights to challenge the dismissals; it is thus preferable for employers to make every effort to reach a retrenchment agreement with the employees.[/vc_column_text][vc_column_text]

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How to manage the employment relationship where the employer needs to reduce the number of employees it employs for operational, financial or technological reasons (retrenchment)

Notice of termination: Incompatibility

Notice to attend a Hearing into Alleged Incompatibility