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Retrenchment Realities: The What, Why, and Can a Company Rehire

by | Oct 9, 2023 | Personal Finance

​Since the COVID-19 pandemic and its devastating economic impact, retrenchment has taken centre stage, and receiving that dreaded retrenchment letter has become a reality for many South Africans. Employers across various industries have had to make tough decisions to reduce their workforce due to a range of issues, including financial difficulties, restructuring operations, and labour strikes affecting sectors like mining and transportation. But what exactly is retrenchment, and why do companies turn to it as a solution? Also, can a company hire again after retrenchment?
In this blog, we take a closer look at all things retrenchment in South Africa, explore the legal aspects governing it, and shed light on the rights of both employers and employees in this challenging process.

What Is Retrenchment

What Is Retrenchment?

Retrenchment is a legal procedure used by employers for different reasons, including financial problems, making changes in how the company operates, or reducing the number of employees. The retrenchment policy is clearly defined in section 189/189(a) of the Labour Relations Act and the Basic Conditions of Employment Act. Its purpose is to make sure that when employees are let go, it’s done fairly and in compliance with the law.

Why Do Companies Retrench?

Sometimes, businesses are faced with tough choices when it comes to their employees. These decisions usually revolve around maintaining a healthy financial equilibrium. Companies need to stay financially strong so they can keep paying their employees, continue growing, and keep creating job opportunities. But when they encounter financial troubles or when the economy shifts, they might have to resort to retrenchment.

Nonetheless, employers need to show concrete evidence of a financial crisis to justify the decision. Various reasons can lead to retrenchment, including:

Ineffective Leadership & Resource Shortages: When leaders don’t do their jobs effectively, it can lead to financial problems for the company. And if a company lacks crucial materials, it can disrupt its activities.

Tough Competition & Embracing Technology: Bigger and more competitive companies can force smaller ones out of the market. Companies might choose to use technology over human labour to boost profits.

Ownership Changes: When new owners take over a company, they might need to reduce the workforce.

Low Employee Productivity & Skills Gap: When employees don’t contribute sufficiently to the company’s earnings, it can be a problem. Employees failing to update their skills to match industry developments can lead to difficulties.

Economic Downturn: A decrease in consumer spending can lead to reduced profits for a company.

The Rights Of Employers And Employees When It Comes To Retrenchment

Many people seem to be unsure about the rights of both employers and employees when it comes to retrenchment. Some employers might mistakenly think that letting employees go is as easy as sending a termination notice because of the company’s operational problems.

Another common mistake is when employers choose specific employees for retrenchment instead of using a fair method like the Last In First Out (LIFO) principle, which is suggested by the Labor Relations Act. Other factors such as ​​length of service, qualifications, skills and experience can also form part of the selection criteria.

Repercussions For Unlawful Retrenchments

If employers slip up in these areas, it could lead to some serious repercussions down the road. If the employee feels the retrenchment was unfair or they feel the retrenchment was due to discrimination, the employee has the right to complain to The Commission for Conciliation, Mediation and Arbitration (CCMA).

It is essential to note that legally, an employer has to follow a strict retrenchment process when retrenching employees. If the employer doesn’t follow this process or carries out retrenchments without a valid reason, they might end up compensating the employee for up to a year’s worth of their regular pay, even if they provided the said employee with adequate retrenchment cover. To maintain fairness for both employers and employees, it’s crucial to have a good grasp of section 189 of the Labor Relations Act.

Can A Company Hire After Retrenchment

Can A Company Hire After Retrenchment

As a rule, it’s legally acceptable for a business to bring on new staff following downsizing. Nonetheless, certain constraints must be kept in mind. It’s crucial to understand that you can’t downsize an employee from a certain role and immediately appoint a replacement. Such a move could potentially open the company up to legal allegations of unfair dismissal, which could notably impede a strong defence.

On the other hand, a business can lawfully downsize employees while hiring new ones at the same time, as long as the job actions don’t clash for the same role. For example, during a phase of business contraction, it’s acceptable to retrench an operations manager and bring on sales experts to drive new business. The main point to remember is that retrenching an employee with the sole aim of rapidly hiring another to fill the same role is not allowed.

Timing of New Hires

There aren’t explicit rules about the timing for hiring after downsizing, but it’s crucial to exercise caution if you’re planning to hire a new employee for a role that was recently held by a former employee. If you recruit for the same position within six months of downsizing, freezing, or eliminating it, you could potentially face legal issues.

To lower the risk of legal disagreements, it’s wise to wait a minimum of six months before filling any roles that have been frozen or eliminated. This is especially important if you decide not to rehire the individual who was let go, as they may feel discriminated against if the new hire greatly differs from them in aspects such as age, religion, gender, or other factors.

How Does Retrenchment Work In South Africa

How Does Retrenchment Work In South Africa

South African labour laws are clear on the rules for retrenchment. The main legal instruments include the Labor Relations Act No. 66 of 1995 (as amended), which oversees the entire retrenchment process right up until employees receive their retrenchment package, the Code of Good Practice for Dismissals based on Operational Requirements, offering guidelines for fair retrenchment procedures, and the Basic Conditions of Employment Act No. 75 of 1997 (as amended), covering various labour-related aspects, including retrenchment. You can find these documents on the Department of Labor’s website at www.labour.gov.za.

In South Africa, companies can retrench employees only for operational reasons, which might be due to financial challenges, technological advancements, or changes in business processes that make certain skills no longer necessary.

The Legal Requirements for Retrenchments

Three sections of the Labour Relations Act, namely 16, 189, and 189A, lay out the rules and regulations when it comes to retrenchment. Employers have a responsibility to discuss the situation with the employees affected by retrenchment and consider all potential solutions before making any final decisions. Additionally, there are rules in place to safeguard the confidentiality of employee information throughout this process. If you work for a smaller company with fewer than 50 employees, you can expect a similar process as those in larger companies with over 50 employees.

The Consultation Process

If a company has over 50 employees, there are specific rules outlined in Section 189A of the Labour Relations Act to ensure a fair process during retrenchment. These rules require the company to do a few things:

  1. Provide written notices to employees who will be affected by the retrenchment. These notices should explain why the retrenchment is happening and discuss any possible alternatives.
  2. It’s crucial to engage in discussions with employees and trade unions to agree on different aspects of the retrenchment process.

Severance Pay and Benefits

Under the Basic Conditions of Employment Act, employees have a right to receive retrenchment pay. This usually equals one week’s worth of salary for each year of service. On top of that, employees are entitled to any remaining leave pay, the salary for the notice period, and other perks such as a proportional bonus and contributions to their pension fund.

Surviving Retrenchment and Debt Review with National Debt Advisors

Surviving Retrenchment and Debt Review with National Debt Advisors

Experiencing retrenchment during debt review can be incredibly stressful as it may feel like you’ll never achieve your goal of becoming debt-free. However, there are solutions available. During this period, it is essential to take the right steps to manage your financial turmoil effectively.

At National Debt Advisors, we are here for you every step of the way from their clients, even if they get retrenched. The first thing to do is to reach out to your debt counsellor immediately. Your National Debt Advisors Debt Counsellor will work with your creditors to secure a grace period or renegotiate your payment terms, helping you navigate the loss of income. Additionally, most creditors are willing to offer a grace period of up to three months while you seek alternative employment.

At National Debt Advisors, we also go the extra mile to support our debt review clients by providing credit life insurance. This insurance helps cover your debt repayments while you’re unemployed. If you’re up to date with your debt review payments and the required waiting period has passed, you can request immediate activation of your coverage. This invaluable support can assist you in paying your debts for up to 12 months during your period of unemployment. Moreover, if, after six months, you’re still without a job, an Affidavit stating your continued unemployment can extend the coverage for the remaining six months. So, don’t hesitate to contact National Debt Advisors after a retrenchment to explore the various options available to help you navigate this challenging period.

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