While the term “retrenchment” is often used colloquially to describe an employer’s dismissal of an employee on a no-fault basis, where the dismissal is as a result of the employer’s business needs. While this, in law, can constitute a fair reason for dismissal, it is important that employers comply with the legislatively prescribed procedure therein and to follow the guidelines and principles that have been established in case law.
Section 188 of the Labour Relations Act 66 of 1995 (“the Act”) stipulates that a dismissal that is not automatically unfair,[1] can be deemed an unfair dismissal if the employer is unable to prove:
“a) that the reason for the dismissal is a fair reason: –
- related to the employer’s conduct or capacity; or
- based on the employer’s operational requirements; and
- b) that dismissal was effected in accordance with a fair procedure.”
While the focus of this article is not on dismissal based on misconduct, dismissal based on incapacity, nor procedurally defective dismissals, be sure to keep an eye on Legal Lynx for more in-depth articles in the future.
The term “operational requirements” is defined in section 213 of the Act as “requirements based on the economic, technological, structural or similar needs of an employer.”
In terms of section 192 of the Act, once the employer has proven the existence of a dismissal, the employer bears the onus to prove that the dismissal was fair. Therefore, there are high stakes involved, and employers should tread carefully and comply with all pertinent provisions of the Act when considering the dismissal of employees in South Africa.
In terms of sections 193 and 194 of the Act, the possible remedies for an employee who has been able to prove that their dismissal is unfair, can be reinstatement, re-employment in a similar role, or payment of compensation to such former employee. The amount of compensation to be paid can, in cases of unfair dismissal, be up to the equivalent of twelve months’ remuneration at the rate of remuneration the employee was receiving up to date of dismissal. Where a determination has been made, on the basis of a protected ground, that there has been automatically unfair dismissal, an employee can be entitled to up to twenty-four months’ remuneration.
As you can see, the finding of an unfair dismissal can have a financially devastating impact on a business, and it is therefore crucial to understand what the guidelines for substantively and procedurally fair dismissals are. Employers must not attempt to disguise other reasons for dismissals as retrenchments, as this can easily be uncovered by judicial scrutiny, at the peril of a disingenuous employer.
Section 189 of the Act requires that employers must engage in a consultation process once the intention to retrench is established. This would be inclusive of representatives in terms of a collective agreement, a workplace forum or trade union. The consultation process must be a meaningful joint consensus-seeking process. Measures must be agreed on: in order to avoid the dismissal or otherwise minimise the number of dismissal or delay them; to mitigate the adverse effects of the dismissal; establishing a selection criterion for dismissal; and to decide on severance pay.
The employer must further issue a written notice of such consultation and disclose factors therein such as:
- The reasons for the proposed dismissals;
- The alternatives that the employer considered before retrenchment and why each of these was deemed unsuitable;
- The number of employees likely to be affected and which particular job categories are being considered for retrenchment;
- The proposed selection method for retrenchment;
- The timing of such proposed retrenchment;
- The severance pay proposed;
- Assistance the employer is willing to offer to employees likely to be retrenchment
- Possibilities for future re-employment.
- The total number of employees employed by the employer.
- The number of employees retrenched in the preceding 12 months.
The consulting parties (employees and their representatives) are able to make representations, and the employer must provide a response to such representations. If the selection criteria for dismissal cannot be decided upon, fair and objective criteria must be decided.
In Umicore Catalyst South Africa (Pty) Ltd v National Union of Metalworkers of South Africa and Others (2024) 45 ILJ 2545 (LAC), the Labour Appeal Court (LAC) held that a behavioural assessment focusing on factors such as communication, initiative, enthusiasm and determination constituted a highly subjective and unfair selection criteria. It is therefore imperative to use an objective criterion for selection of employees, such as, for example, LIFO – Last In, First Out.
The decision to retrench cannot be considered a fait accompli, or a foregone conclusion, with the consultation process having no bearing of the outcome thereof. In the recent case of HeroTel (Pty) Ltd v Moses and Others (CA05/2024) [2025] ZALAC 42, it was emphasised that the true reason for the retrenchment must be disclosed, so that the affected employees can be in a position to dispute same. The economic and financial reasons put forward by the employer, in that matter, were found to constitute a “self-created financial crisis” and not sufficient to justify the retrenchment of their employees.
Section 189A prescribes further requirements for dismissal based on operational requirements by employers with more than 50 employees. Where there are large scale retrenchments that may affect 10% or more of the employer’s workforce, the time period for consultation can be varied. The section further gives separate regulations for the employees affected by section 189A to strike and the employers to lock out. The CCMA can also be appointed to mediate between parties and the Labour Court can be approached if the employer does not comply with a fair procedure to compel the employer to comply with a fair procedure and interdict them from dismissing employees under section 189A until there is compliance with a fair procedure.
The recent case of South African Commercial Catering and Allied Workers Union obo Thage v Connect Financial Services (Pty) Ltd (2024) 45 ILJ 2536 (LAC) illustrates that an employer participating in a consultation meeting in good faith can result in a binding agreement, which will not later easily be challenged. The employer held four facilitated consultations in a company where there were two distinctive divisions: the credit division and the call centre division. While retrenchments were necessary in the credit division, because of economic and technological changes, the affected employees were advised during the consultation process that there could be re-deployment to the call centre division, should such vacancies arise, and the affected employees be willing to accept these.
Post retrenchment of these affected employees, vacancies in the call centre division arose and the affected employees were advised to apply therein. The employees refused and insisted on reinstatement into the call centre positions. The Labour Court later found that the agreement under consultation was that placement into vacancies outside of the credit division would not be automatic, but instead by application. The LAC reaffirmed the Labour Court’s finding in that the employer was not obliged to place employees from the credit division automatically into vacancies in the call centre division. The LAC held that the dismissals were substantively fair.
It is therefore of the utmost importance to consult meaningfully and in good faith. Courts seldom interfere with agreements made by parties during the retrenchment process, save for mala fides on the part of one of the parties. Consultations in the retrenchment process should be thoroughly documented, so that any disputes which may later arise can be contradicted with evidence.
The retrenchment process should not be seen as a way to avoid proving the misconduct or incapacity of employees an employer wishes to dismiss. Employers are bound to conduct a thorough consultation process and must have legitimate “economic, technological, structural or similar needs” which require them to retrench employees. Employees, in turn, must engage with the process and be reasonable in their demands, when their employer is acting in good faith. As unpleasant as retrenchment can be for both parties, it is a pivotal mechanism in ensuring an employer’s survival and the preservation of the remaining jobs at the employer’s entity.
[1] In terms of section 187 of the Act by reasons of, inter alia, pregnancy, race, gender and sex, or participation in a protected strike.
While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of the articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes and should not be construed as legal advice.
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