Impending retrenchments: Where will the money come from?

With the Covid-19 pandemic and the consequent lockdown wreaking havoc on the global and local economies, many companies are under extreme financial pressure. Large numbers of businesses, particularly small to medium sized enterprises, will close as a result of these events.  When the lockdown is lifted, those which remain open may still be unable to  give their staff enough work – a situation which may continue for some considerable time. This paper addresses the options open to each of these in turn.

Companies that will have to close:

The current lockdown regulations do not permit the flouting of existing labour legislation, and any business that wishes to close down is bound by the provisions of the Labour Relations Act (LRA) and specifically section 189, which stipulates detailed procedures that need to be followed in the event that employees are retrenched.  Specifically, the LRA contemplates “small scale retrenchments”, i.e. retrenchments at companies of fewer than 50 employees or larger companies that are retrenching relatively small numbers of employees, and “large scale retrenchments”, i.e. large companies that are contemplating retrenching relatively large numbers of employees.  The procedures themselves differ substantially, but in both cases where there is no  agreement to implement alternatives short of dismissal (see further below), employees’ services are terminated and they then qualify for severance packages, determined in accordance with provisions in the Basic Conditions of Employment Act (BCEA) or, where applicable, in the collective agreements in different industries regulated by bargaining councils.

Where the BCEA applies, severance packages must be equal to at least one weeks’ remuneration for every completed year of service for each employee.  In addition to this, employees are usually also paid notice pay of between one and four weeks in lieu of working. This means that the amount of money needed to meet these legal obligations can be significant and many companies may not have sufficient funds to do so.  However, these legal obligations remain which may well mean that the business will become insolvent and have to contemplate liquidation.

Companies able to survive the lockdown:

Where companies are able to re-open operations but are not able to provide their staff with sufficient work, they may need to consider retrenching some of their employees. However, here again the costs of these retrenchments may be unaffordable.  In such cases, there are three options for the company to consider:

Option One: Implement short-time working arrangements, whereby employees are required to work a reduced number of hours every week with a consequent reduction in pay.  Procedures for this option are dealt with expressly in some collective agreements, but otherwise can only be implemented by agreement with the staff. While this may meet with some resistance, employees may well decide that keeping their jobs, albeit on a reduced wage, is preferable to a once-off retrenchment payment together with the fact that, should the company’s financial position improve, it may be possible for it to revert to normal hours operations. Moreover, there is also the consideration that should the company be forced into liquidation, all employees will lose their jobs and may only be paid a small percentage of their retrenchment packages some years later.

Option Two: Temporarily lay employees off on an unpaid basis until such time as the order book fills up and the employees may return to work.  Again, this may be easier if procedures are expressly dealt with in any applicable collective agreement. However, in the absence of a collective agreement, an agreement with employees on this alternative may be reached.  Arrangements, such as the temporary lay-off schemes run through the CCMA where employees can receive allowances equal to 75% of the worker’s basic wage, subject to a maximum allowance of R R12,840 per month will become critical. 

Option Three: Employees can agree to a salary/wage cut in order to save the company from closing down. As this is a change in the terms and conditions of service, this option can only be done with the full agreement and cooperation of each employee.

For advice on these options, please email us. Please look out for our upcoming e-book, “Effective Implementation of Short-Time, Temporary Lay-offs and Retrenchments”, a guide for employers who are contemplating implementing alternative working time arrangements or retrenchments in these tough economic times.  To pre-order your copy, send us an email request with RETRENCHMENT GUIDELINES PRE-ORDER in the subject line to be the first to receive a copy and qualify for a 10% discount off the R150.00 (Ex. VAT) price.