In the current economic climate, there are few individuals that are unfamiliar with the meaning of the term 'retrenchment'. The economic crisis has had a severe effect on South Africa's labour market, with the pace of retrenchments having doubled over the past year.

Prof Haroon Bhorat from the University of Cape Town School of Economics told the 22nd annual labour law conference that retrenchment figures showed a 36 percent increase in the period from January 2008 to January 2009, compared to a 14 percent increase from 2006 - 2007.

A total number of 4899 firms retrenched employees from January 2008 to January 2009 in South Africa.

The Labour Relations Act (LRA) permits employers to dismiss employees for 'operational requirements', also known as retrenchments. An employer can retrench employees in cases where the company is experiencing financial hardship, but also in cases where the employee's job becomes redundant through a restructuring process, or where the employer wants to reduce costs and/or wishes to increase the profitability and productivity.

However, employers are advised to tread carefully when carrying out retrenchments. Employees rights are well protected by the LRA, and uncalculated retrenchments could end up in the Labour Court, with a judgment stating that the employer must reinstate the retrenched employees, or pay them hefty compensation and legal costs.

If an employer wants to retrench an employee, the retrenchment must be fair. Fairness is decided on two grounds ? substantive fairness, and procedural fairness.

'Substantive fairness' weighs up whether the retrenchment was appropriate in the circumstances. It must be a reason based on the employer's operational requirements. It must be a reason that is fair, lawful, reasonable under the circumstances, justifiable (provable) and based on sound business rationale.

In the case of retrenchment, the law says that it is not unfair for an employer to retrench an employee if the employer:

  • needs to cut down on staff for economic reasons;

  • is changing the business operation, and the employee's job is no longer required or the job content changes to such an extent that the employee is unable to meet the skill levels required for the job;

  • upgrades technology.

If an employer is retrenching for financial reasons ? and this is usually the case ? the employer must be able to reasonably prove that there is a connection between his financial constraints and the need to retrench.

Employers must also be able to show that the criteria used to select employees to be retrenched supports this financial reason. In other words, employers must be able to show what savings would be achieved by retrenching the selected employees or was required for the sustainability of the business.

'Procedural fairness' considers the rights of the worker to be treated justly in the process of retrenchment. The procedure is clearly laid down step-by-step in section 189 and 189A of the Labour Relations Act.

An overwhelming majority of retrenchments occurred in companies with less than 50 employees. More than 50 percent of all liquidations in the past year have been of small and medium-sized enterprises. Bearing this in mind, it is vital that small and medium sized enterprise business owners and managers are well educated in applicable labour legislation and best business practices.

Carol Tissiman is the course convener for the 8 week online UCT Certificate Course in Practical Labour Law.

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