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What is a Fair Reason to Retrench?

By Ivan Israelstam

                                                                                              

The number of retrenchments occurring in South Africa has been alarmingly high over the past five years and shows no sign of reducing. The law requires that:

 

  • The employer follows a fair procedure aimed at an attempt to find alternatives to retrenchment. This involves good faith consultations with the employees concerned or with their representatives.
  • Fair or agreed criteria are used to decide which employees should be targeted for retrenchment.
  • There an acceptable reason for the need for retrenchments.

 

Section 213 of the LRA indicates that the reasons for retrenchment may be based on the economic, technological, structural or similar needs of the employer. It is necessary to look at each of these reasons more closely.

 

  • Typically, economic reasons given for the need for retrenchment include the ability to make money or to retain sufficient funds to continue operations. Such reasons need not be confined to the current financial situation but could include the company’s projected financial circumstances. The courts are divided on whether the desire to increase profits is a fair reason for retrenchment.
  • Technological reasons advanced for the need to retrench often include the introduction of new chemical formulas, equipment, computer packages, electronic systems and techniques that might reduce the need for labour.
  • Structural reasons advanced for the need to retrench include the need to flatten the management structure or to switch from a functional corporate structure to a project based structure.

 

The question that is left without a clear answer is: ‘What does the LRA definition mean when it refers to “…. or similar needs of an employer”?’ That is, what other operational needs (similar to economic, technological or structural needs) would be acceptable in law as reasons to justify retrenchments? The case of Tiger Foods Brands Limited vs L Levy (CLL May  2007 page 102) provides an inkling as to a possible answer to this question. In this case the employer wished to introduce a system whereby employees would work on public holidays. The employees embarked on a strike in protest against this move. During the industrial action a large number of strikers attacked replacement workers with knobkerries. Also, a manager was shot and several other received death threats. As the company was unable to identify the perpetrators it concluded that it was unable to continue managing the workplace. It therefore decided to consider retrenching several employees. The union disputed the CCMA’s jurisdiction to facilitate the retrenchment consultations on the grounds that the reasons for the proposed retrenchments did not fall under the definition of operational requirements in section 213 of the LRA. The CCMA agreed with the union stating that retrenchment is supposed to be based on no fault dismissals. The employees targeted for retrenchment had already been suspended for reasons related to misconduct.

 

When the company took this ruling to the Labour Court the Court found that the CCMA was wrong. It found that the CCMA arbitrator had, amongst others, made the error of ignoring the last part of the LRA’s definition of operational requirements that says: “or similar needs of an employer”. The Court decided that the company’s need to protect its managers and to manage the business fell under the definition of ‘operational requirements’ as they affected the viability of the business. These were grounds “similar to economic, technological or structural needs.”

 

In my view this finding makes sense. It seems that the legislators’ decision to include in the definition “economic, technological or structural needs” was based on the intention to give examples of what operational requirements entail rather than to consider this list of three needs as exclusive. The inclusion of the phrase “or similar needs” makes it clear that the definition should be interpreted broadly rather than narrowly. It would make no sense to include some types of operational requirements and to exclude others arbitrarily.

 

Employers are warned not to interpret this finding as a licence to invent their own reasons for retrenchment. Should the reasons given for retrenchment be found by the courts to be bogus or not to constitute operational requirements the employer will lose the case. Losing a case where a number of employees have been retrenched is likely to be extremely costly for employers. This is more so because a likely remedy for the unfair retrenchments will be the reinstatement with full back pay of all the retrenchees.

 

For example, it would be folly for an employer to retrench employees on the basis of its operational requirement for ‘employees who perform their work well’. While the need for good work performance can well be argued to be an operational requirement there is a separate legal procedure prescribed in Schedule 8 of the LRA for dealing with poor performance. In the case of NEHAWU vs Medicor (Pty) Ltd (2005, 1 BLLR 10) the Labour Court forced the employer to reinstate 67 unfairly retrenched employees with full back pay. This was because the employer had used the retrenchment process to get rid of alleged poor performers.

 

In the light of the above, before dabbling in the dangerous area of retrenchments, employers should obtain legal advice from a reputable expert in labour law.

 

Ivan Israelstam is the Chief Executive of Labour Law Management Consulting. He may be contacted on (011) 888-7944 or 082 852 2973 or on e-mail address:

 

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