Retrenchments - Back to Basics
By Jan du Toit
Nobody can argue that last year was economically a very challenging year with lots of fatalities. Many employers decided to close shop because of the economic climate and as such we saw a number of retrenchments during 2011. Based on the emails we receive daily from employers and employees in need of assistance with retrenchment procedures, it seems as if there was a peak in retrenchments towards the end of August beginning of September, at the end of October beginning of November and again in January this year. One can only pray that the Eurozone will sort out its financial affairs during the coming months.
Based on the information presented by the CCMA to the Parliamentary Portfolio Committee in October last year, it seems as if there was a spike in retrenchments towards September / October for the past three years. In terms of small scale retrenchments (less than 50 employees) 1932 cases were referred to the CCMA between April and July 2011. This is still well below the 2572 cases reported for same period in 2009.
Looking at the questions that are asked by employers and employees regarding retrenchments, there clearly seems to be a lack of understanding of the rights of employees in terms of section 189 / 189(a) of the Labour Relations Act as well as the Basic Conditions of Employment Act. Some employers are under the impression that retrenching an employee is as simple as issuing a notice of termination of the employment relationship based on the operational requirements of the company. Another common mistake is to selectively nominate “problem” employees for retrenchment instead of using a fair selection criteria such as the LIFO (Last In First Out) principal recommended by LRA.
For these employers there may be a nasty surprise in the near future because a retrenched employee may refer his / her dismissal to the CCMA or to the labour court if more than one employee was retrenched. Compensation of up to 12 months of the employee’s normal remuneration may be awarded for not following a fair procedure and / or retrenching for a fair reason (procedural and substantive fairness).
In order to ensure fairness towards both employer and employee, it is necessary to better understand section 189 of the Labour Relations Act.
When may an employer retrench employees?
Employers may dismiss employees based on their operational requirement as defined in section 213 of the Labour Relations Act. "Operational requirements" means requirements based on the economic, technological, structural or similar needs of an employer.
It must be remembered that the onus will be on the employer to prove that a genuine operational requirement existed. The employer cannot merely claim that for instance the company was not making money and as such had to retrench employees; the employer will have to produce evidence of such a financial crisis.
How to dismiss employees based on the operational requirements of the employer?
Section 189 of the Labour Relations Act is applicable and prescribes a joint consensus seeking process in an attempt to reach consensus on appropriate measures (section 189(2)) -
• to avoid the dismissals;
• to minimise the number of dismissals;
• to change the timing of the dismissals; and
• to mitigate the adverse effects of the dismissals;
• the method for selecting the employees to be dismissed; and
• the severance pay for dismissed employees.
Who must the employer consult with (section 189(1))?
The employer must consult with one of the following parties, starting at the top of this structure moving down until the appropriate consulting party has been identified -
• any person whom the employer is required to consult in terms of a collective agreement;
• if there is no collective agreement that requires consultation –
- a workplace forum, if the employees likely to be affected by the proposed dismissals are employed in a workplace in respect of which there is a workplace forum; and
- any registered trade union whose members are likely to be affected by the proposed dismissals;
• if there is no workplace forum in the workplace in which the employees likely to be affected by the proposed dismissals are employed, any registered trade union whose members are likely to be affected by the proposed dismissals; or
• if there is no such trade union, the employees likely to be affected by the proposed dismissals or their representatives nominated for that purpose.
What information must be disclosed to affected employees (section 189(3))?
The employer must issue a written notice inviting the other consulting party to consult with it and disclose in writing all relevant information, including, but not limited to-
• the reasons for the proposed dismissals;
• the alternatives that the employer considered before proposing the dismissals, and the reasons for rejecting each of those alternatives;
• the number of employees likely to be affected and the job categories in which they are employed;
• the proposed method for selecting which employees to dismiss;
• the time when, or the period during which, the dismissals are likely to take effect;
• the severance pay proposed;
• any assistance that the employer proposes to offer to the employees likely to be dismissed;
• the possibility of the future re-employment of the employees who are dismissed;
• the number of employees employed by the employer; and
• the number of employees that the employer has dismissed for reasons based on its operation requirements in the preceding 12 months.
The employer must allow the other consulting party an opportunity during consultation to make representations about any matter dealt with above, as well as any other matter relating to the proposed dismissals. The employer must consider and respond to the representations made by the other consulting party and, if the employer does not agree with them, the employer must state the reasons for disagreeing. If any representation is made in writing, the employer must respond in writing.
How long does this process take?
The duration of the joint consensus seeking process entirely depends on the circumstances such as the reason for the contemplated dismissals, the complexity of the information disclosed and the number of employees affected. Normally on average such a process takes between two and three weeks.
We employee more than 50 employees and contemplate dismissing at least 10 employees based on the company’s operational requirements.
In such instances the employer will have to follow the steps outlined in section 189A of the Labour Relations Act. For the purpose of this article I am not going to discuss section 189 A. The most important points to remember are that:
• Timeframes are prescribed. The employer may effectively not take a decision to dismiss during the first 30 days, or give notice of termination of employment before 60 days lapsed.
• Employees have the right to strike or to refer the matter to the Labour Court once notice has been given by the employer.
How do I select employees to be retrenched?
Selection criteria that are generally accepted to be fair include length of service, skills and qualifications. Generally the test for fair and objective criteria will be satisfied by the use of the "last in first out" (LIFO) principle. There may be instances where the LIFO principle or other criteria needs to be adapted. The LIFO principle for example should not operate so as to undermine an agreed affirmative action programme. Exceptions may also include the retention of employees based on criteria mentioned above which are fundamental to the successful operation of the business. These exceptions should however be treated with caution.
What alternatives to a dismissal may be raised by affected employees?
Again this entirely depends on the circumstances. These are some suggestion that may be made by affected employees in order to save or make more money instead of having to retrench them. The employer must consider these suggestions and communicate back to the affected employees the reasons for rejecting the suggestions. The most common mistake made by employers is to not consider alternatives suggested by the affected employees. It must be remembered that the primary purpose of the joint consensus seeking process is to avoid dismissals and the employer must as such be open to workable alternatives. The dismissal of an employee could be found to be substantively unfair if a reasonable and workable suggestion as alternative to a dismissal was made but the employer outright rejected such a suggestion without justification.
• measures to increase productivity
• short time
• rationalizing costs and expenditure
• increase or decrease in shifts and length of shifts
• decreasing the number of contractors or casual labourers
• using employees to perform the functions performed by contractors or casual labourers
• outsourcing a function to its own staff after the employees have formed themselves into a company
• skills development to enable employees to move into different positions
• stopping overtime or Sunday work
• reducing wages (by agreement)
• early retirement offers or schemes
• moratoriums on hiring new employees
• gradual reduction of workforce by way of natural turnover
• extended unpaid leave or temporary lay-off
How much severance pay?
Employees are entitled to 1 week’s severance pay for each completed and continuous year of service with the same employer. The employer does not have to pay severance pay if an employee unreasonably refuses to accept an offer of employment with the current employer or another employer (sections 41(2), 41(4) of the Basic Conditions of Employment Act).
It must be remembered that severance pay for employees that fall under the scope of a bargaining council such as the MEIBC or MIBCO may be different to the minimum prescribed by the BCEA.
How is severance pay calculated?
According to the determination issued by the Minister of Labour in Government Notice 691 of 2003 the following payments are included in an employee's remuneration for the purpose of calculating severance pay:
• housing or accommodation allowance or subsidy; or housing or accommodation received as a benefit in kind. Any housing or accommodation allowance or subsidy paid in cash, or the value thereof if paid in kind, is deemed to be part of remuneration.
• car allowance or the value of provision of a company car. This does not apply in those instances where the employer provides a vehicle to the employee so as to allow the employee to travel to and from work, with no other private usage of the vehicle by the employee.
• any cash payments made to an employee, except those listed as exclusions in 2 below.
• employer's contributions to medical aid, pension, provident or similar funds or schemes, must be considered as part of the employee's remuneration and must be included when making calculations in terms of this notice.
• employer's contributions to funeral or death benefit schemes also form part of remuneration and must be included in the calculation of remuneration.
• The following items do not form part of the employee's remuneration for the purpose of these calculations:
- any cash payment or payment in kind that is provided in order to enable the employee to work (for example, equipment, tools or a similar allowance, or the provision of transport or the payment of a transport allowance to enable the employee to travel to and from work only.
- a relocation allowance
- gratuities, for example tips received from customers, and gifts received from the employer.
- share incentive schemes.
- discretionary payments not related to the employee's hours of work or performance, for example a discretionary profit-sharing scheme.
- an entertainment allowance
- an education or schooling allowance.
• The value of payments in kind must be determined as follows.
- a value agreed to in either a contract of employment or collective agreement, provided that the agreed value may not be less than the cost to the employer of providing the payment in kind; or
- the cost to the employer of providing the payment in kind.
- (Employers who provide accommodation to the employees, or any other benefits in kind, are advised to enter into a written agreement with the employee regarding the value of the accommodation or other benefits provided in kind.)
• An employee is not entitled to a payment or the cash value of a payment in kind as part of remuneration if:
- the employee received the payment or enjoyed, or was entitled to enjoy, the payment in kind during the relevant period.
- in the case of a contribution to a fund or scheme that forms part of the remuneration, the employer paid a contribution in respect of the relevant period.
• If the payment fluctuates, it must be calculated over a period of 13 weeks or if the employee has been in employment for shorter period, over that period.
• A payment received in a particular period in respect of a longer period (e.g. a 13th cheque) must be calculated pro rata.
• This schedule applies only to the minimum payments that an employer is required to make in terms of the Basic Conditions of Employment Act, 1977.
It should be noted that where the employee's remuneration fluctuates regularly, the calculation of payment for annual leave must be based on the employee’s average earnings for the previous 13 weeks. The average will of course, include commission and or overtime paid for.
Where, on dismissal or retrenchment, an employee is entitled to an amount which refers to the period that the employer is obliged to give the employee notice of such termination of service, in other words, the employer pays the employee an amount equal to the salary the employee would have earned if such employee had worked for the full notice period, the amount (notice pay) will not qualify for the exemption in terms of Sections 7A(4A) or 10(1)(x) of the Income Tax Act.
Any amount in cash or in kind, received by or accrued to an employee or the holder of any office by way of bonus, gratuity or compensation (including payment for accumulated leave and redundancy payment) because of the termination of his / her services is exempt from tax to the extent of a cumulative amount of R30 000 provided that the termination or impending termination of such person’s services is due to superannuation, ill-health or other infirmity or the termination of the person’s services is as a result of the employer having ceased trading or where he / she has affected a general reduction in personnel or a reduction in personnel of a particular class.
Questions asked by some of our subscribers:
Q. We have been given a “voluntary retrenchment" agreement for those of us that would prefer to take advantage of the retrenchment package that is offered if we sign such a letter. I would like to know if one can still draw unemployment if we sign.
A. Yes as long as the employee can prove that the employer initiated the voluntary offer.
Q. Must I be given notice of termination of employment and must such notice be paid?
A. Yes, retrenchments are “no fault” dismissals. It is not the fault of the employee that the company cannot afford the salary of the employee anymore and as such notice periods agreed upon must be honoured. The employer may ask the employee not to return to work but must then pay the notice period.
Q. What about my annual leave in the event that I am retrenched?
A. Accumulated annual leave must be paid out.
Jan du Toit is available to assist employers with retrenchments as well as with disciplinary enquiries and ccma matters. His email address is email@example.com