First of a series of labour-related articles for healthcare establishments and practices by Jacqui Reed, an attorney specialising in corporate employment law and immigration law. Before establishing her own practice in 2017, Jacqui graduated from WITS School of Law and was employed at leading corporate law firms Webber Wentzel, Norton Rose and ENS Africa. She is also qualified as an advocate and served as a member of the Johannesburg Bar for four years.

SYNOPSIS: Employers are entitled to retrench employees in order to increase its profits, rather than to avoid losses.  It can be argued the proposed restructuring is necessary to increase its competitiveness. 

Section 189 of the Labour Relations Act provides that where an employer contemplates dismissing one or more employees for reasons relating to its operational requirements, it is obliged to consult with those employees (and / or their representatives) who are likely to be affected by the proposed dismissals. It is an unfortunate reality of both the global and the local economy that this section is being invoked by both large and small businesses that operate in South Africa in recent years.

South African employers are obliged to dismiss employees both for a fair reason and in accordance with a fair procedure. It is necessary for an employer to demonstrate a valid commercial rationale for retrenchment in order to fairly dismiss an employee on the grounds of operational requirements. Operational requirements are defined as “requirements based on the economic, technological, structural or similar needs of an employer.” The purpose of section 189 of the LRA is to ensure that both the employer and employee engage in a meaningful consensus-seeking process.

The reasons put forward by the employer for a proposed retrenchment must be commercially reasonable, and in good faith. The employer is not required to show that the retrenchments are necessary to avoid financial ruin. It is permitted to argue that the proposed restructuring is necessary to increase its competitiveness or to increase efficiencies by reducing its staff compliment. The employer is accordingly entitled to retrench employees in order to increase its profits, rather than to avoid losses.

It is critical not only that the employer is rational and takes into consideration the employee’s submissions during the consultation process, but also that it does not take a final decision in relation to the restructuring prior to the commencement of the consultation process. Equally, employees have a duty to respond to the employer’s proposals during the consultation process.

The consultation process commences when the employer issues all potentially affected employees with a section 189(3) letter. The purpose of the section 189(3) letter is to provide employees with all necessary and relevant information including the reasons for the proposed dismissals, the alternatives to dismissals that were considered and rejected by the employer, the number of employees likely to be affected and the job categories in which they are employed, the proposed method for selecting employees for dismissal, the time when or the period during which the dismissals are likely to take effect, the severance pay proposed, any assistance the employer proposes to offer to employees likely to be dismissed, the possibility of future re-employment and the number of employees dismissed for operational requirements in the previous 12 months.

Employees are entitled to request that the employer disclose additional information, provided that it is not confidential or legally privileged, during the consultation process. Employees are also entitled to submit representations in writing. In those circumstances, the employer is obliged to respond to those representations in writing.

It is important to appreciate that the section 189 process requires the employer only to consult with its employees. It is not obliged to negotiate with employees. This means that the employer is permitted to impose its decision to restructure its business and dismiss employees for operational reasons following a meaningful consultation process with its employees.

The time period within which a consultation process ought to take place varies between 4 and 8 weeks but will depend on the size of the employer’s business, as well as the number of potentially affected employees. It will also depend on whether the employees engage meaningfully in the consultation process and whether their representations materially affect the proposed restructuring.

Employers are permitted to inform employees, after issuing the section 189(3) letter, that they are entitled to apply for a voluntary severance package. The employer will consider all applications and choose which applications to accept and which applications to reject. A voluntary severance package will comprise of all statutory entitlements (leave, notice and severance pay) together with an additional ex gratia amount which will be paid by the employer in exchange for the employee agreeing, in writing, to waive his / her rights to refer an unfair dismissal dispute and / or any other dispute arising from the employment relationship and the termination of that relationship.

A retrenchment process can be tricky to implement correctly and in such a way that it achieves optimal commercial benefit, and employers are advised to seek legal advice before undertaking one.