Retrenchment & Restructuring

Retrenchment - No easy way out!

International perspective: A recent survey carried out by Harvey Nash for the Confederation of British Industry (CPI) reveals that nearly two thirds of British employers have freezed all recruitment. Most employers plan pay freezes or only moderate increases in the next wage round. A third of bonus schemes have been restructured. The average retrenchment package can cost an employer  around  £12 000.

British Airways (BA) has called for 5 000 jobs to be cut and a two-year wage freeze. After a management plea for employees to help to cut costs, seven thousand staff have applied for voluntary pay cuts, including 800 who will work unpaid for up to a month.


Retrenchment has always been a highly emotive issue. More so in the current economic climate when worldwide and in South Africa, retrenchment is taking place across industries at a scale not experienced for over a decade and unemployment is at an all time high. The loss of a job has extreme consequences, especially for those with limited skills and that is why a retrenchment exercise should be a last resort and not a first response.

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The hidden costs of retrenchment are significant  and should not be overlooked.  These include direct costs such as severance payouts and indirect costs such as management time taken up with consultation. It may also impact on other key areas such as

  • Negatively affecting the company’s Employment Equity plans, goals and demographic profile
  • Disturbing established work teams and thus resulting in productivity losses
  • The loss of skilled staff who will be difficult to replace in an upturn
  • Affecting the union’s representivity in the bargaining unit and  possibly resulting in  de-recognition
Dismissal for operational requirements

Dismissal for operational requirements i.e. ‘requirements based on the economic, technological, structural or similar needs of an employer’, have always been hotly   contested by employees and their representatives because they are classified as ‘no fault’ dismissals on the part of the employee. In other words, the dismissal is not because of an employee’s misconduct or incapacity (i.e. inability to do the job) but because it is in the interests of the employer to reduce the number and/or location/skills of the employees they need to employ.

With the introduction of Section 189A of the amended LRA, Act 66 of 1995 a distinction is now made in respect of pre-dismissal procedures required in the event that the employer contemplates dismissing employees for operational requirements on a ‘large scale.’

In such circumstances the Commission for Conciliation, Mediation and Arbitration (CCMA) may be requested to appoint a facilitator to assist the parties, who must conduct the exercise in terms of regulations issued by the Department of Labour. This effectively provides for the introduction of third party intervention prior to an employer implementing a decision to dismiss or the affected employees disputing such a decision.

The provisions of Section 189A are only applicable to the employment of more than 50 employees.  ‘Large scale’ is determined by the proportion of the total headcount the employer is contemplating dismissing i.e. 10 employees if the employer employs up to 200 employees – 50 employees if the employer employs more than 500 employees.

Because facilitation takes place in a context where the parties are dealing with ‘no fault’ terminations and on dismissals on a ‘large scale’, the provision may be used by parties in a genuine attempt to use third party assistance in seeking consensus on highly emotional issues.

Facilitation may also be tactically requested by employers in order to escape later procedural challenges at the Labour Court or, in the case of employees, to delay their date of dismissal for as long as possible.

Consultation, alternatives to retrenchment and selection criteria
The three most common mistakes employers make when contemplating retrenchment are:

  • Moving too quickly – the root of the retrenchment process is proper consultation and this takes time.
  • Having a closed mind – the employer may not unilaterally decide to retrench and is required to look at all alternatives with an open mind.
  • Getting the selection criteria wrong – it is not advisable to use the retrenchment situation as a means of solving every other problem related to your employees



The LRA s189 is clear that any employer contemplating dismissal of one or more employees based on its operational requirements must consult with the affected parties, be it an individual or a collectivity. They in turn must engage in a joint consensus seeking process and attempt to reach agreement on appropriate measures to –

  • Avoid the dismissals
  • To minimise the number of the dismissals
  • To change the timing of the dismissals and
  • To mitigate the adverse effects of the dismissal

They must also reach agreement on the method for selecting employees and the amount of severance pay to be paid.

Alternatives to retrenchment
Viable alternatives to a retrenchment exercise to be considered could include -

  • Hiring freezes
  • Cessation of overtime
  • Layoffs
  • Short time
  • Plant shutdowns
  • Early retirement
  • Voluntary separation
  • General cost cutting actions
  • Agreed wage freeze
  • Agreed wage sacrifice for a period

Not all these will be feasible and much will depend on the nature of the employer’s business or operation. For example if it is a continuous operation.

Selection criteria
The key to selection criteria is that they should be the subject of consultation and that they are fair and reasonable. Possible criteria for retrenchment selection are –

  • LIF0 (last in first out) – the most common but does not have to be used
  • Performance (backed up with an appraisal system)
  • Timekeeping records could be justifiable
  • Disciplinary records – but may cause problems
  • Promotability, skills and the future needs of the enterprise

If agreement cannot be reached in consultation, the decision still remains that of the employer but it must be objective and reasonable.

If you would like to speak to us about dismissals based on operational requirements (A.K.A retrenchment)  please contact one of our consultants via our contact page.