Covid-19 brought many businesses to a crossroad regarding the business’ future and its ability to survive the economic effect of this pandemic. In this regard, business owners are confronted with several challenging decisions:
- Hang in there, ride the stormy wave, while making temporary operational adjustments; or
- Scaling down operations to a manageable size (thus almost regressing to where the business was some time back); or
- Consider alternative (permanent) survival measures, such as outsourcing and/or automation; or
- Throw in the towel and close the business down altogether.
These are by no means easy decisions to take, especially when it has to be taken in very volatile and uncertain times. No one really knows for how long the pandemic is going to prevail with its devastating impact on the economy and it remains uncertain how much (if any) of its effects will stay with us in some or other form after it subsided.
In order to be able to take an informed decision regarding the way forward with one’s business, one needs fairly accurate information regarding the future, otherwise, you have to listen to your “gut” and intuition, sound-board it with someone with the necessary knowledge and experience regarding your situation, then take your decision regarding the best way forward.
This article aims to address the most daunting of decisions employers could be compelled to take in times like we are currently experiencing, namely retrenching staff.
In this regard, employers are likely to meet with strong opposition from employees and trade unions, but in the final analysis the ultimate decision is, legally speaking, in the hands of the employer. The guidance provided in this article should provide the employer with the knowledge to execute retrenchments in such a way (despite facing fierce opposition) that the outcome will be legally and morally defensible.
For practical considerations, I will deliver this article in two parts, focusing in Part 1 on the situation where the employer, with a workforce of up to 50 employees, contemplates, for reasons related to operational requirements, to retrench employees. In Part 2, the focus will shift to employers, contemplating retrenchment, with workforces in excess of 50 employees.
As this article focuses on “pruning” the business in economically challenging times, it is perhaps prudent to look conceptually at the term “pruning”. The Oxford Dictionary defines “pruning”, paraphrased as to: “…remove (…) unwanted parts…”. Within this particular situation, we can substitute “unwanted” with “redundant”, in order to bring “pruning” within proper context.
The commonly used expression, used in respect of workplace redundancy, is that someone is made redundant by the employer. This implies that redundancy of a position occurs by design and is normally the result of a set of economic circumstances causing the employer to almost engineer the redundancy. This engineering can be out of necessity and in the interest of causing the business to become leaner in order to survive in economically challenging times, or this engineering could be to decommission operations and let go of the business.
Either way, such redundancy involves a conscious process requiring much planning and consideration. In our law, the occurrence of redundancy in the workplace, is regarded as a “no fault” situation. It is not the redundant employee’s fault that his/her position is done away with, nor is it the employer’s fault for having to resort to declaring a position redundant – the redundancy is ascribed to economic reality.
There is however a distinction to be drawn between, on the one hand, restructuring or re-engineering one’s business from a position of strength e.g. to increase the business’ profit by, for instance, diversifying business output and, on the other hand, restructuring or re-engineering the business from a position of weakness e.g. due to the collapse of the market, loss of contracts or Covid-19 crippling the business.
Business survival, as well as business growth, can both be stimuli for the need to declare positions redundant, resulting in retrenchment and both these causes are legitimate causes. The secret of a successful restructuring or re-engineering of the business lies in the process that needs to be followed and the considerations forming part of it.
Outsourcing as a means of combatting economic challenges versus retrenchment
While the emphasis in this article will be on staff reduction and retrenchment (the “pruning exercise”), it is necessary, within wider context, to draw a distinction between retrenchment and outsourcing.
In the first paragraph under “Introduction” above, I made mention of outsourcing as an operational adjustment to consider when restructuring the business for economic survival. It has been proven that outsourcing one’s non-core business activities to an entity which specialises in the activity concerned, not only disposes with the ramifications associated with employing staff to produce what the activity concerned is supposed contribute to the business, but also saves on operational costs.
From the viewpoint of the employee, associated with the activity to be outsourced, outsourcing legally guarantees a seamless transfer from the outsourcing employer to the entity the activity is outsourced to, on terms and conditions which are, on the whole, not less favourable than those enjoyed at the outsourcing employer.
The reason why I bring outsourcing into the equation when I deal with retrenchment, is that, while the two processes differ substantially as far as procedural requirements are concerned, there also are significant “touch points” between the two processes to take cognisance of.
During a restructuring and retrenchment exercise, the deliberations between the employer and the employees concerned are characterised by the process of consultation.
At consultation, relevant information pertaining to the restructuring and its impact on the employees is exchanged between the parties with the objective to enable the employer to take an informed decision regarding whether and how the restructuring and retrenchment will be carried out. With consultation, the decision-making power therefore stays intact with the employer. There is no need for the affected employees to agree to the retrenchment that will affect them, but the consultation process will inform them why and how this is to happen, taking into consideration their reasonable interests.
With outsourcing, a distinctly different approach is required, which, considered from a general perspective, it entails simply replacing the “old” employer with the “new” employer, hence the latter steps into the shoes of the former. Outsourcing involves negotiation between two parties. On the one side, the “old” employer and “new” employer, acting jointly or separately, and on the other side the employee party, which could be a formally recognised trade union, a workplace forum, a registered trade union or the affected employees themselves.
Negotiation, by its very nature, requires agreement between the parties in order to effect any change in employment conditions. Whereas the “what” of the outsourcing is laid down by the provisions of Section 197 of the Labour Relations Act (LRA), as a given, the “how” is left to be hammered out through negotiation.
For purposes of this article, all the reader needs to take due cognisance of is that when resorting to outsourcing as a means of restructuring a certain part or parts of the business, you cannot rely on consultation as the interactive process to make it happen, you being the sole decision maker. Outsourced human resources are not “retrenched” but transferred and the business activity these employees are associated with is not done away with, as in the case of redundancy that leads to retrenchment but carries on by way of an outsourcing arrangement.
From a practical point of view, it would probably be sensible to first outsource those non-core business activities conducive of being outsourced and thereafter to dispose with those business activities you want or need to do away with. This implies, first invoking the provisions of Section 197 of the LRA and thereafter invoking the provisions of Section 189 of the LRA.
Obviously, if the business is closing down completely, outsourcing really does not come into play, because all operations come to an end. Outsourcing, as a process, is however a topic for another article altogether, which I will attend to in due course.
Section 189 of the Labour Relations Act (LRA) – from contemplation to execution
Section 189 of the LRA sets out the procedures to follow when embarking on a restructuring exercise which has the potential of resulting in retrenchment. Section 189 and Section 189A are also, arguably, two of the more well-written and user-friendly pieces of legislation within context of South African employment law.
I will now guide the reader step-by-step on the retrenchment journey, from contemplation to execution:
By way of introduction to this journey, I must just recap and reiterate that where retrenchment is at stake, the interaction between the employer and the affected employees is based on consultation and not on negotiation.
What constitutes consultation?
Consultation is the exchange of information relevant to the subject matter of discussion between the employer and the affected employee, with the objective to enable the employer to arrive at an informed decision.
When must the employer consult?
Section 189(1) clearly states that the employer must consult when the employer contemplates retrenching one or more employees based on the operational requirements of the employer.
When one contemplates something, you plan and consider what you intend to do, while remaining open to persuasion either way. Contemplating retrenchment therefore rules out that the employer has already made up his/her mind regarding retrenchment and then engage in consultation, to simply go through the motions. At the contemplation phase the employer must still have an open mind to be reasonably influenced in his/her decision to retrench, as well as to make reasonable adjustments to the way in which to carry out the retrenchment.
With whom does the employer need to consult?
Section 189(1) sub-paragraphs (a) through to (d) provide a hierarchy of forums which the employer is required to consult with, when retrenchment is contemplated. These forums are as listed below, summarised by me, and following this particular sequence:
Any entity the employer is compelled to consult in terms of a collective agreement, failing which:
- A workplace forum (where such is established) in conjunction with any registered trade union whose members are likely to be affected by the contemplated retrenchments, failing which
- Any registered trade union whose members are likely to be affected by the contemplated retrenchments, failing which
- The employees likely to be affected by the contemplated retrenchments or their representatives, nominated for that purpose.
When reading the above-mentioned sub-paragraphs, the following question arises: Where one deals with a workforce where the composition is such that it comprises more than one of the above-mentioned forums (notably, comprising both unionised and non-unionised sections of the workforce), is the employer required to consult at multiple forums?
Relevant case law seems to indicate that consulting at one forum only applies where a collective agreement, such as a recognition agreement concluded with a trade union representing the majority of the eligible employees of the employer, exists. Moreover, this agreement must specifically require that, in case of restructuring exercises, the union has to be consulted. This implies that whatever the outcome of such consultation is, it will apply across the board to all affected employees, unionised and non-unionised.
My personal view regarding whom to consult with, is that the best adherence to democratic considerations should be strived for, at the same time taking cognisance of the majoritarian principle, as well as freedom of association.
There is however no straight-forward recipe with an across-the-board application when it comes to whether consultation at a single forum applies or whether consultation at more than one forum would apply. Each situation should be considered on its own merits, taking cognisance of the level of representivity of the employee representative body concerned. A 60% plus representivity may, for instance, suggest consultation at a single forum.
Where significant numbers of affected employees are however not covered by the recognition agreement with the majority union, it is my view that it would be advisable to consult more widely and possibly at more of the forums mentioned under Section 189(1). In this regard, it is however advisable to reserve pronouncing on your decision regarding retrenchments and the possible adjustments to be made until you have consulted at all forums concerned, so as to adopt a uniform and all-inclusive stance on the restructuring and its consequences.
Employers are however advised to consult experts in the field of industrial relations when there is any doubt or uncertainty regarding at which forum or forums to consult.
What must be the nature of the consultation process?
Section 189(2) of the LRA requires that where the employer engages in consultation with affected employees or their recognised representatives, such consultation must be characterised by a meaningful, joint, consensus-seeking engagement.
With “meaningful”, is implied that the employee party concerned must be empowered with enough detailed and relevant information regarding the subject matter of consultation to be able to consult properly.
With “joint” is implied that the consultation process is not one-sided but provides for a synergistic attempt at finding the most reasonable and fair outcome during consultation.
With “consensus-seeking” is meant that the employer must strive, as far as possible, to achieve a meeting of minds as to the eventual outcome of the consultation. It still does not require actual agreement between the parties, as would be required during negotiation, but if agreement could none-the-less be achieved, it would be first prize.
What are the subjects of the required consultation?
Section 189(2) of the LRA goes further to list the content or agenda of the required consultation.
Section 189(2)(a) places the following on the agenda:
- Appropriate measures to avoid retrenchments (e.g. job sharing, salary cuts, etc.)
- Appropriate measures to minimise the number of retrenchments (cancel/phase out temporary contracts, introduce early retirement, etc.)
- Changing the timing of retrenchments (e.g. to accommodate certain individual interests, such as allowing a pregnant employee affected by the restructuring, to give birth while still being employed and enjoying the relevant medical benefits)
- Mitigating the adverse effects of retrenchments (e.g. outplacement, up-skilling opportunities to enhance the employee’s prospects of securing alternative employment, counselling and coaching, assistance with job seeking, drawing up CV’s, etc.)
Section 189(2)(b), read in conjunction with Section 189(7), requires that the method of selecting the employees to be retrenched needs to be a subject of discussion during consultation. In some instances the collective agreement or policy on retrenchment at a particular company may prescribe which selection criteria need to be used, failing which, Section 189(7) of the LRA provides that where the consulting parties could not agree on the selection criteria, criteria which are fair and objective would apply. In this regard, Last in – First out (LIFO), or some objective competency-based assessment linked to the available positions in the new organisational structure could be used as selection criterion.
Section 189(2)(c) of the LRA provides that the severance compensation to be paid to retrenched employees needs to be a topic of discussion during consultation. Section 41(2) of the Basic Conditions of Employment Act (BCEA) provides that severance compensation, calculated at one week’s remuneration per completed year of service, has to be paid to employees being retrenched. Some employers may have agreed, contractually or otherwise, to a more advantageous severance compensation formula, in which event the latter will be applicable.
What entails the actual face-to-face interaction between the employer and the employee or employees affected by the restructuring?
Section 189(3) of the LRA contains possibly the most crucially important provisions to be observed by the employer contemplating retrenchment. It stipulates the procedural requirements and content in respect of the face-to-face interaction between the parties on the basis of consultation.
It requires that the employer has to formally (in writing) invite the affected employees or their recognised representatives to consult on a range of subjects relevant to the restructuring and possible retrenchment. This written invitation must be accompanied by the disclosure, in writing, of relevant information, examples of which are listed in Section 189(3).
Cautionary note: At the point of physically engaging in consultation with the affected employees, it is reasonable to assume that the employer has already spent some time in contemplating and planning its plan of action, albeit tentatively and open to change. It therefore stands to reason that it would not be fair to provide the required information to affected employees on unreasonably short notice or to provide it only on the day of the consultation. The disclosure of this information must be such that the affected employee party could reasonably have prepared to enter into meaningful consultation.
For the convenience of the reader, I summarised the examples of information to be disclosed to the affected employees, to be utilised for their preparation for the face-to face consultation:
- The reason for the proposed restructuring and retrenchment, commonly referred to as the commercial rationale.
- The alternatives to retrenchment which the employer considered, as well as the reasons for rejecting each of these alternatives.
- The number of employees likely to be affected by the restructuring and the job categories involved.
- The method used to select the employees to be retrenched (selection criteria).
- The time when or the period during which the retrenchments are likely to take effect.
- The severance compensation proposed.
- Any assistance which the employer proposes to offer to the employees likely to be retrenched.
- The possibility of future re-employment of the employees who are retrenched.
- The number of employees employed by the employer (the size of the workforce).
- The number of employees retrenched by the employer in the preceding 12 months.
Although I exercised due caution to summarise the required information in such a way that it captures the essence of what needs to be disclosed, I did paraphrase here and there, so it may be advisable for the reader to access Section 189 of the LRA, as published, in case of any uncertainty, since the wording of the latter will prevail in the event of an interpretation challenge.
To what extent is the affected employee party to be given the opportunity to influence the employer’s decision to retrench?
Section 189(5) compels the employer to allow the employee party the opportunity during consultation to make representations about any matter related to the subject matter of consultation, therefore, to submit proposals to either avoid or mitigate retrenchments.
Once these representations/proposals have been made, the employer is compelled by Section 189(6)(a) to consider this input from the employee party and to respond to such input, which includes providing reasons, should the employer hold the view that the proposals made are inappropriate or not feasible in the circumstances. Where these proposals by the employee party are made in writing, Section 189(6)(b) compels the employer to respond in writing.
Populating the new structure
For those employers who restructure its operations, but despite retrenching some staff members, continues operations in an altered format, the old organisation structure is invariably replaced with a new organisational structure.
Based on the fact that redundancy, as result of operational requirements, is regarded as a “no fault”-situation, it stands to reason that the affected employees be given preferential consideration for being accommodated in the new organisation structure, provided that they have the necessary qualifications and experience.
Alternative employment offered
It is possible that an affected employee may be offered alternative employment within the greater organisation as an alternative to retrenchment. If this alternative employment, objectively, constitutes a reasonable alternative compared with the position formerly held, Section 41(4) of the BCEA provides that, should the affected employee decline the offer of such reasonable alternative, he/she will forfeit severance compensation upon his/her retrenchment.
The reasonableness of the alternative employment offered is essentially a factual question and the alternative employment need not be identical to the former position, but, on the whole, compatible. I however need to draw your attention to a subtle qualification contained in Section 41(4) of the BCEA: It mentions that the offer of alternative employment made by the employer may include an offer of alternative employment with another employer, arranged by the affected employee’s employer.
It became customary, especially in case of larger employers and corporations, to offer voluntary retrenchment to its workforce, also referred to as “voluntary severance package” (VSP), where the necessity exists to reduce staff. Invariably, such offer comes with the proviso that the employer reserves the sole discretion to disqualify certain employees from making use of this offer, where the positions occupied by these applicants are regarded as essential to retain within the organisation.
The reason for resorting to the offer of voluntary retrenchment are twofold, namely: (1) to avoid having to impose retrenchment on the workforce, by allowing some participative management of the situation, and (2) to facilitate a clean break with the retrenched employee, with no prospect of disputing the retrenchment in the CCMA and labour courts. This is achieved by entering into a full and final separation agreement with the employee who accepted the offer, effectively rendering the CCMA and labour courts without jurisdiction to entertain any dispute pertaining to the retrenchment. Usually, the offer of voluntary retrenchment includes some form of financial incentive, such as an enhanced formula for severance compensation, in order to make the acceptance of the offer more attractive.
Due to the apparent voluntary nature of the retrenchment, the employee will, on face value, not qualify for UIF-benefits, as the retrenchment would appear to be “self-inflicted”. In fact, the UI-19 form, which formally notifies the UIF of the termination of employment, specifies the reason for the termination of employment. To this end, the form makes provision for, among others, a termination code for “Retrenchment/Staff Reduction”, as well as for “Voluntary severance package” (VSP). There is however a certain way in which the employee, who opted for VSP, can still legitimately be entitled to UIF-benefits, which I will gladly share with readers on specific request.
Judicial scrutiny of the reason for retrenchment
Where retrenchment is resorted to, it goes hand-in-hand with the redundancy of a position or positions. As a consequence, the employee loses his/her job because the business activity associated with the position the employee occupied is done away with and is no longer needed.
It can therefore be expected that the Labour Court will scrutinise and double-check the actual reason for the retrenchment, in order to ensure that retrenchment is not resorted to (using retrenchment as a guise or front) in order to:
- get rid of an organised labour dispensation, for instance, involving trade unions.
- dispose with a disciplinary matter, which became problematic to deal with in the ordinary way.
- dispose with an incapacity matter.
Each of the above-mentioned problem areas has its own prescribed procedure to be followed, duly considering the peculiarities of each situation, thereby ensuring the most effective and fair outcome. Similarly, retrenchment has its own procedure – to each its own and no opportunistic cross-purpose utilisation to be applied.
Where the retrenching employer re-introduces the business activities he/she previously disposed of under the pretence of restructuring, and does so within a relatively short period from having resorted to retrenchment (arguably, within 6 consecutive months), it will cast reasonable doubt on the bona fides of the employer’s restructuring exercise.
In practice, a preferential re-employment undertaking given to retrenched employees, operates for a 6-month period post retrenchment. These undertakings usually provide that, for the first 6 months post retrenchment, the onus is on the employer to keep contact with the retrenched employees, with a view of keeping them in mind and apprised of internally advertised vacancies, while, thereafter, the onus shifts to the retrenched employee to keep in touch with the former employer. In many cases, retrenched employees however either lost interest after 6 months elapsed since retrenchment or have secured alternative employment, causing the “umbilical cord” attaching them to the former employer, being relinquished.
It sometimes becomes necessary and unavoidable to restructure one’s business in order to save the company from closing down. In doing so, some employment opportunities may be retained, despite having to dispose with other positions at the same time.
“Pruning” often stimulates growth over time and inherent in this painful process there is always a glimmer of hope, not only for the enterprise itself, but also for those the enterprise had to let go. There is evidence of success stories where retrenched employees eventually started their own businesses and over time even created jobs and so stimulated the economy. It all boils down to the level of care, sensitivity, and support with which a restructuring is executed, conducive of sustained relationships, no burning bridges, and the encouragement of innovative entrepreneurship.
Once the employer consulted in a meaningful, joint, consensus-seeking manner with the affected employees, as described in this article and retrenchment eventually seems unavoidable, all that is left, is to execute the retrenchment in a fair, consistent and transparent way. This will provide to the employer at least an excellent prognosis on success, should the retrenchment exercise be challenged.
You are advised to make a point of it to utilise the consultation process as inclusively as possible in order to not only save your business, but also the livelihood of your workforce to the extent to which it can be retained with economic justification, while providing those which you needed to retrench with the very best prospect of taking root again.