Employment and Labour Law

 

 

Yes, severance pay and other lump sum payments received on termination (like payments for accumulated leave or a pro-rata bonus) have tax implications. Severance pay qualifies for specific tax rates under the Income Tax Act and may be subject to a tax-free portion up to a certain cumulative limit over a person's lifetime. Notice pay (payment in lieu of working the notice period) is generally taxed as normal income. It is advisable to seek tax advice to understand the specific tax treatment of your final payments.

The duration varies depending on the scale and complexity of the retrenchment. A Section 189 process for a small number of employees might take a few weeks. A large-scale retrenchment under Section 189A has minimum prescribed timeframes (e.g., consultation periods of at least 30 or 60 days) and can take several months, especially if facilitated by the CCMA or a bargaining council. The LRA requires the parties to attempt to reach consensus expeditiously.

Navigating the legal requirements of retrenchment can be challenging for both employers and employees. Seeking professional legal advice is highly recommended to ensure compliance, understand your rights, and manage the process correctly.

The criteria for selecting employees must be fair and objective. Ideally, the selection criteria should be agreed upon during the consultation process. If no agreement is reached, the employer must apply criteria that are fair and objective. Common fair criteria include:

  • Last In, First Out (LIFO) - length of service.
  • Skills, qualifications, and experience necessary for the remaining roles.
  • Performance records (must be applied fairly and objectively, not as a disguised performance management).
  • Attendance records.
  • Discriminatory criteria based on factors such as race, gender, age (unless retirement age), religion, or union membership are automatically unfair.

During consultation, the parties must explore and attempt to reach consensus on measures to avoid or minimise dismissals. Potential alternatives include:

  • Transfers to alternative positions within the company.
  • Reduced working hours (short-time).
  • Temporary lay-offs.
  • Wage reductions (requires employee agreement).
  • Eliminating or reducing overtime.
  • Offering early retirement or voluntary severance packages.
  • Restructuring roles or departments differently.
  • Using natural attrition (not filling vacant positions).
  • The employer must genuinely consider all reasonable and practicable alternatives raised.
     

Valid operational requirements are defined in the LRA as needs based on the employer's:

  • Economic needs: Relates to the financial situation of the business, such as financial losses, reduced market demand, or the need to reduce costs to ensure profitability or prevent closure.
  • Technological needs: Arise from the introduction of new technology that makes existing jobs redundant or requires a different skill set.
  • Structural needs: Result from a restructuring of the business, such as a merger, acquisition, closure of a division, or changes in the organizational structure leading to redundant positions.
  • Similar needs: This category covers other business needs comparable to economic, technological, or structural reasons that necessitate a reduction or reallocation of the workforce.
  • The employer must demonstrate a genuine and justifiable operational reason for the retrenchment.
     
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Dismissal Due to Operational Requirements

Dismissal Due to Operational Requirements (Retrenchment) - Ensuring Fairness

Given the significant impact on employees and the potential for misuse (such as disguised misconduct dismissals), South African labour law, particularly the Labour Relations Act (LRA), rigorously regulates retrenchments to ensure both substantive and procedural fairness. Courts closely scrutinise these dismissals.

What is Dismissal Due to Operational Requirements (Retrenchment)? 

In South Africa, a dismissal based on operational requirements, commonly known as retrenchment, occurs when an employer terminates an employee's contract because of the employer's economic, technological, structural, or similar needs. This is a no-fault dismissal process regulated by the Labour Relations Act (LRA), which mandates that employers follow a fair procedure and engage in meaningful consultation with affected employees or their representatives.

Substantive Fairness - Is the Reason Genuine?

For a retrenchment to be substantively fair, the employer's decision must be based on genuine operational requirements. Section 213 of the LRA defines these as "economic, technological, structural or similar needs of the employer."

The employer bears the onus to prove that a genuine operational requirement necessitating dismissals exists. Simply claiming financial difficulty is insufficient; evidence must support the claim.

Crucially, substantive fairness requires that the decision to retrench is the last resort, not the first. As established in case law like SACTWU & others v Discreto, the court's function is not to second-guess the commercial wisdom of the employer's decision but to determine if the decision was properly and genuinely justifiable by operational requirements – in other words, if it was a rational commercial or business decision and not merely a sham to dismiss employees for unrelated reasons.

It is vital to understand that "employees that do not meet the business requirements of the employer" in the context of operational requirements does not refer to employees with poor work performance or incapacity due to ill health. These issues must be addressed through separate, specific incapacity procedures under the LRA.

Procedural Fairness - The Joint Consensus-Seeking Process

The LRA mandates a strict procedural process for retrenchments, primarily centred around joint consensus-seeking consultations. This process is not a mere formality but has a substantive purpose: to genuinely explore alternatives to dismissal and minimise the impact of retrenchments.

Section 189 (and Section 189A for larger retrenchments involving more than 50 employees) outlines the procedural steps. The employer must consult with:

  1. Any person the employer is required to consult in terms of a collective agreement.
  2. A workplace forum, if applicable, and any registered trade union whose members are likely to be affected.
  3. If no workplace forum, any registered trade union whose members are likely to be affected.
  4. If no such trade union, the affected employees or their nominated representatives.
The employer must issue a written notice disclosing all relevant information, including:
  • The reasons for the proposed dismissals.
  • Alternatives considered to avoid dismissals and why they were rejected.
  • The number of employees likely to be affected and their job categories.
  • The proposed method for selecting employees for dismissal.
  • The timing of the dismissals.
  • Proposed severance pay.
  • Assistance offered to affected employees.
  • The possibility of future re-employment.
  • The total number of employees and previous retrenchments in the last 12 months.

The consulting parties must attempt to reach consensus on measures to avoid or minimise dismissals, change the timing, mitigate adverse effects, the selection method, and severance pay. The employer must consider and respond to representations made during consultation.

The duration of the consultation process varies depending on the complexity and number of employees involved, but it requires genuine engagement over a reasonable period. For larger retrenchments (Section 189A), prescribed timeframes apply.

Alternatives to Dismissal

A critical part of the consultation process is exploring alternatives to dismissal. These could include:

  • Measures to increase productivity or reduce costs.
  • Short-time or temporary lay-offs.
  • Transfers to alternative positions.
  • Wage reductions (by agreement).
  • Early retirement or voluntary severance packages.
  • Stopping overtime or using contractors.
  • Training or skills development for new roles.

The employer must genuinely consider any reasonable and workable alternatives proposed during consultation.

Fair Selection Criteria

If dismissals are unavoidable, a fair and objective method for selecting employees must be used. The criteria should ideally be agreed upon during consultation. If not agreed, they must be fair and objective.

Commonly accepted fair criteria include:

  • Length of service (often the "last in, first out" - LIFO principle).
  • Skills, qualifications, and experience.
  • Performance and attendance records (used cautiously and fairly).

Criteria that are unfairly discriminatory (e.g., based on gender, race, union membership, pregnancy) are unlawful. While LIFO is common, it may need adaptation, for instance, to align with affirmative action goals or retain employees with essential skills fundamental to the business's survival.

Severance Pay

Employees dismissed for operational requirements are legally entitled to severance pay in terms of Section 41 of the Basic Conditions of Employment Act (BCEA).

  • The minimum entitlement is at least one week's remuneration for each completed year of continuous service with the employer.
  • Remuneration for severance pay calculation includes various components like housing allowances, car allowances (with certain exceptions), and employer contributions to medical aid/pension funds, but excludes certain payments like travel allowances for work, gratuities, and discretionary bonuses.
  • An employee forfeits their right to severance pay if they unreasonably refuse to accept a reasonable offer of alternative employment with the same employer or another employer.

Severance pay is subject to specific tax rules, with certain exemptions potentially applicable.

Other Considerations

  • Fixed-Term Contracts - Premature termination of a fixed-term contract due to operational requirements can be substantively unfair, constituting a breach of contract unless the contract itself provides for such termination.
  • Changes to Terms and Conditions - If operational needs necessitate changes to terms and conditions of employment, and an employee unreasonably refuses to accept necessary changes after proper consultation, dismissal might be justified, but this must be handled carefully and fairly.
  • Preferential Re-employment - Employers should give preference to previously retrenched employees if positions with comparable qualifications become available, subject to certain conditions and time limits agreed upon during consultation.

The Code of Good Practice

The Code of Good Practice on Dismissals based on Operational Requirements provides further guidance on interpreting and applying the principles of substantive and procedural fairness under the LRA. It reinforces the need for genuine consultation, information disclosure, exploring alternatives, and fair selection criteria.

Your Expert Guide Through the Retrenchment Process with VDM Attorneys

The retrenchment process is legally complex and fraught with potential pitfalls for employers. Failure to comply strictly with both substantive and procedural fairness requirements can lead to costly and time-consuming disputes at the CCMA or Labour Court, resulting in significant compensation awards.

Employees facing potential retrenchment also have rights and are entitled to a fair process and correct severance benefits.

Whether you are an employer contemplating retrenchments or an employee affected by proposed dismissals for operational requirements, seeking expert legal advice is crucial. Our team at VDM Attorneys has extensive experience in South African labour law and can guide you through every step of the process, ensuring compliance, protecting your rights, and striving for the best possible outcome.

Contact VDM Attorneys today for expert assistance with dismissals based on operational requirements.