The High Stakes of Retrenchment: Balancing Business Efficiency and Legal Compliance

1. INTRODUCTION

Technological advancements, particularly artificial intelligence and robotics, have significantly impacted the workforce, making many jobs redundant and allowing employers to reduce labor costs and office space. Beyond technology, workforce reduction may also result from financial constraints such as declining revenues, economic downturns, high operating costs, business restructuring through mergers and acquisitions, shifts in business focus, or streamlining operations for efficiency. However, downsizing must be handled carefully, as it is a legally sensitive process. Employers must adhere to legal frameworks to avoid financial liabilities, ensuring a fair and lawful approach to workforce reduction. This article provides a legal perspective on the proper execution of downsizing and or retrenchment.

2. RETRENCHMENT

Is a term commonly used in legal and labor contexts to describe the termination of employment due to economic or operational reasons? Retrenchment occurs when positions become redundant or a company cannot sustain its workforce due to financial constraints.

In the case of Punjab Land Development and Reclamation Corporation Ltd., Chandigarh v. Presiding Officer, Labour Court, Chandigarh and Others, the Supreme Court of India had ample time to discuss at length the meaning of retrenchment and it holds that;

“Retrenchment” entails the termination of service of a workman by the employer for any reason whatsoever, excluding instances such as voluntary retirement, superannuation, or termination due to ill health.”

From the above definition; downsizing, reduction of works, redundancy all fall under the definition of retrenchment. Much as these words are used interchangeably in as far as labor law is concern they do carry the simple meaning of termination for operational reasons.

Crucially, the Court in Punjab Land Development and Reclamation Corporation Ltd (supra) held that complete termination of all employees due to the bona fide closure of an industry does not fall under the definition of “retrenchment.” Instead, retrenchment is confined to terminating surplus labor within an ongoing enterprise.

Rule 23 of the Employment and Labor relation (Code of good practice) define termination for retrenchment to mean termination of employment arising from operational requirement of a business. The employment and labor relation act define operational requirement as requirement based on economics, technological structure, or similar needs of the employer.

3. EMPLOYER’S RIGHT TO RETRENCH: A SACRED PREROGATIVE OR A LEGAL MINEFIELD?

The authority to modify the operational structure of a company or organization, including making positions redundant or implementing retrenchments, rests solely with the employer or company owner. Courts do not have the power to question why an employer has chosen to make such changes. However, the court may intervene if the retrenchment is seen as unfair, malicious, or in bad faith such as if it is used as a tool for discrimination or personal vendetta rather than a genuine operational need. The Supreme Court of India had ample time to discuss on this in the case of Parry & Co. Ltd vs P.C. Pal & Ors,¹ and it held that;

It is within the managerial discretion of an employer to organize and arrange his business in the manner he considers best. So long as that is done bona fide it is not competent for a tribunal to question its propriety. If a scheme for such reorganization results in surplus age of employees, no employer is expected to carry the burden of such economic tribunal dead weight and retrenchment has to be accepted as inevitable. However, unfortunate it is…………It is not the function of the Tribunal, to go into question whether such a scheme is profitable or not and whether it should have been adopted by the employer. So long as retrenchment carried out is bona fide and not vitiated by any consideration for victimization or unfair labor practice and the employer comes to the conclusion that he can carry on his undertaking with reasonable efficiency with the number of employees retained by him after retrenchment, the Tribunal ought not ordinarily to interfere with such decision.

The same stance was taken by the court in Tanzania in the case of Emmanuel Urassa and 10 Others Versus Shared Networks Tanzania Limited², where the High court of Tanzania quoted with approval the decision of the Court of Appeal of South Africa in the case of Hendry vs. Adcock Ingram3 the Labor Court of South Africa held that: –

“When judging and evaluating an employer’s decision to retrench an employee, the court must be cautious not to interfere to the legitimate business decision taken by employers who entitled to restructure”

It is evident that courts should exercise caution and avoid interfering with an employer’s right to retrench workers, provided the process is conducted fairly and without procedural irregularities. The prerogative to retrench lies primarily with the employer, as they are best positioned to determine the operational needs of their business.

However, if retrenchment is carried out with malicious intent—such as deliberately targeting specific employees without valid or justifiable reasons—the court has a duty to intervene.

In such cases, the court must reassess the process to ensure it is fair, reasonable, and justifiable.

Ultimately, while employers have the discretion to restructure their workforce based on legitimate business needs, this authority must not be exercised arbitrarily or abusively. As long as retrenchment follows proper legal procedures and is grounded in genuine operational requirements, courts should respect the employer’s decision.

¹ 1970 AIR 1334, 1969 SCR (2) 976

² Labor Revision No. 467/2019

³ (1988) 19 ID 85 (LC) at 92 B-C

4. LEGAL OBLIGATIONS OF EMPLOYERS PRIOR TO RETRENCHMENT

i. Notice of Retrenchment

An employer who wants to conduct retrenchment has to first issues, notice in relation to retrenchment; A notice is a formal communication issued by the employer to inform employees about the intended retrenchment. The duty to issue notice of retrenchment were insisted or emphasized in the case of Joseph Fis soo and 59 others vs Ithna Asheri Charitable Hospital, 4where the court of appeal of Tanzania held that;

“Particularly, the employer is expected to publish a notice of intended retrenchment, containing all vital information including the reasons for the contemplated retrenchment”.

The retrenchment notice is essential as it informs employees about the process, the reasons behind it, and the timeline, ensuring transparency and fairness in the retrenchment. The importance of this notice cannot be overstated, as it serves as the starting point for consultations between the employer and the affected employees. All other retrenchment procedures follow from this initial step.

In the case of Emmanuel Shio & 8 Others vs. Resolution Insurance Limited5, the Court of Appeal extensively discussed the reasonableness of a retrenchment notice. In this case, the employer issued a retrenchment notice on 2^nd July 2018, which was supposed to last for 30 days. However, just a few hours later, on 3rd July 2018, the employer convened a consultation meeting and immediately proceeded with the retrenchment of employees. The court held that;

“That the said notice did not intend to inform the appellant of the intent and commencement of the retrenchment exercise intimated, but rather to communicate the respondent’s decision reached in the management meeting held on 2^nd July 2018 on retrenching the appellant”.

“A few hours’ notice of retrenchment may not be considered reasonable. We thus hold as the notice was not reasonable, the appellant was not informed of retrenchment and in effect consultation processes were stalled thereof”.

The Court of Appeal found that the retrenchment notice was not meant to initiate a fair consultation process but rather to inform employees of a decision that had already been made. Since the employer proceeded with retrenchment almost immediately after issuing the notice, the employees were not given a genuine opportunity to engage in consultations. As a result, the court deemed the notice unreasonable and concluded that the consultation process was effectively undermined.

⁴ Civil Appeal No. 514/2020

⁵ Civil Appeal No. 495/2020

5. STANDARD RETRENCHMENT NOTICE

Reasonable Notice Period

The notice must provide employees with sufficient time to prepare for the retrenchment process. In Tanzanian jurisprudence, there is no specific legal requirement for the notice period. The key consideration is whether the employee has adequate time to make necessary arrangements. However, in other jurisdictions like India and South Africa, a standard retrenchment notice period of 30 days is prescribed. Given the significance of retrenchment, employers should allow ample time for meaningful discussions with employees.

Clear Justification for Retrenchment

The notice must explicitly state the reasons for retrenchment, ensuring that all affected employees understand the factors leading to the decision.

Outline the retrenchment Procedures

It should specify the steps the employer will take throughout the retrenchment process, providing clarity on how it will be conducted.

Use of Clear and Understandable Language

The notice must be written in a language that is easily comprehensible to all parties involved, ensuring transparency and effective communication.

6. CONSULTATION

The consultation process should be transparent, fair, and constructive. As the name “consultation” suggests, it involves an exchange of ideas and viewpoints between the employer and the affected employees. For it to be meaningful, the employer must approach it with an open mind, providing sufficient information to enable the affected parties to make informed representations. The employer is also obligated to seriously consider these representations and provide clear reasons if they choose to reject any of them.

The court has been stressed that consultation must be meaningful, requiring genuine engagement from all parties to reach consensus. It further clarified that the process should not be approached as a mere checklist or a formality but must have both procedural and substantive elements to ensure fairness.

In National Union of Metal Workers of South Africa and Others v Aveng Trident Steel (a division of Aveng Africa (Pty) Ltd) and another6, the Constitutional Court of South Africa emphasized that retrenchment should only occur after complying with procedural requirements aimed at minimizing its impact on employees. The court held that;

Retrenchments should not be resorted to until “certain procedural requirements intended to minimize the impact on employees” have been complied with………………. This consultation “requires engagement by all the consulting parties with the purpose of reaching consensus”. It is important to note that the approach to this consultation must not merely be a checklist approach – that is, it must not be purely formalistic. There is both a procedural and substantive aspect to this consultation process.

A consultation process is deemed ineffective and not meaningful if the employer has already reached a pre-determined decision or fails to explain why certain suggestions were dismissed. In Solidarity Obo Members v Barloworld Equipment Southern Africa and Others7, the constitutional court of South Africa while deliberating on the essence of consultation it held that;

“For a consultation process to be meaningful, in the context of section 189, the employer must keep an open mind, disclose sufficient information to enable consulting parties to make informed representations, and seriously consider the representations. This entails that the employer is under an obligation to furnish reasons for rejecting representations after it has considered them carefully. Approaching the consultation with a pre-determined outcome and failure to provide reasons for rejecting representations will render the consultation process not meaningful.

⁶ (CCT178/19) [2020] ZACC 23

⁷ 8 [2022] ZACC 15; (2022) 43 ILJ 1757 (CC); [2022] 9 BLLR 779 (CC); 2023 (1) BCLR 51 (CC)

The court did not end there it quoted with approval the decision in the case of Atlantis Diesel Engines8 where it was held that;

“[This] approach requires consultation once the possible need for retrenchment is identified and before a final decision to retrench is reached. It proceeds on the premise that consultation requires more than merely affording an employee an opportunity to comment or express an opinion on a decision already made. It envisages a final decision being taken by management only after there has been consultation in good faith”.

In Solidarity Obbo Members (supra) the constitutional court also noted that the employers are required to share relevant information during the consultation process, but there are exceptions. An employer is not obligated to disclose information that is not available to them, irrelevant to the discussion, or could harm their business interests, such as trade secrets or confidential data. The idea is that the employer should be transparent, but only to the extent that it is necessary for the consultation and does not jeopardize the company’s sensitive or proprietary information. This ensures a balance between transparency and protecting the employer’s legitimate business interests.

While employers are required to consult employees in good faith, they are not obligated to reach an agreement or accept employee proposals. However, employers cannot treat consultation as a mere formality; they must make a genuine effort to reach consensus see in AMCU v Royal Bafokeng Platinum Ltd.

“Consensus-seeking is neither collective bargaining nor negotiation. There is no duty on the consulting parties to reach consensus and the employer need not accept the employees’ proposals. This is not to say that an employer can ‘go through the motions’ in the consulting process. Instead all that is required is a bona fide (good faith) attempt to reach consensus on the part of the employer. This determination, as seen throughout the law reports, is in many respects fact sensitive. Ultimately, the employer retains the discretion to press on with the proposed retrenchment or not”.

⁸ Atlantis nn Diesel Engines (Pty) Ltd v National Union of Metalworkers of South Africa [1994] ZASCA 183; 1995 (3) SA 22 (AD).

7. CRITICAL CONSULTATION AREAS FOR EMPLOYERS IN RETRENCHMENT PROCESSES

The law does not mandate a general consultation process; rather, it specifies key areas that an employer must address during consultation. While these areas are not strictly required to be followed as a checklist format, it is advisable for employers to consider them carefully to ensure a fair and transparent retrenchment process. Below are the areas that should be taken into consideration;

The reasons for the intended retrenchment (the need for retrenchment)
Any measure to avoid or minimize the intended retrenchment such as other job, early retrenchment, voluntary retrenchment package or lay off
Criteria for selecting an employee for retrenchment such as last in first out (LIFO) subject to the need to retain key job experience or special skills affirmative action and qualification.
The timing of retrenchment
Severance pay and other condition on which termination took place
Steps to avoid the adverse effect of termination such as time off to seek work

I. The reasons for the intended retrenchment (the need for retrenchment)

Retrenchment must be supported by valid and justifiable reasons that align with the employer’s operational needs. The employer must be sure of the reasons behind retrenchment which may be economic reasons, technological Advancements, structural Changes, market or business changes, legal or regulatory compliance, strategic repositioning. The rationale for retrenchment should not be arbitrary or malicious but must demonstrate a genuine need to adjust the workforce.

As discussed in Emmanuel Urassa and 10 Others v. Shared Networks Tanzania Limited9, (supra), the court cannot interfere with an employer’s decision to retrench employees if the reasons are genuine and justified. However, if the reasons are not genuine, justified, or are arbitrary to the detriment of the employee, the court has the power to intervene.

The right to retrench for operational reasons comes with the employer’s duty to provide clear, detailed, and valid justifications for the decision or reasons for retrenchment. Transparency is essential to ensure that employees and relevant stakeholders understand the necessity of the retrenchment. The decision must not be driven by bias, discrimination, or intent to unfairly target specific employees.

II. Any measure to avoid or minimize the intended retrenchment such as other job, early retrenchment, voluntary retrenchment package or lay off

On this the employer must make efforts to avoid retrenchments where possible by exploring alternatives such as redeployment or cost-cutting measures. If retrenchments are unavoidable, the employer should then take steps to minimize the number of employees affected by considering voluntary retrenchment packages or early retirements.

Furthermore, employers must take measures to such as offering retraining programs, career counseling, or financial support.

The selection process for retrenchment should also be fair and objective, ensuring that decisions are based on clear and justifiable criteria mitigate the adverse effects of retrenchments. In Solidarity obo Members v Barloworld Equipment Southern Africa and Others (supra) the Constitutional court while stressing on measure to avoid or minimize retrenchment it quoted with approval the decision in the case of SA Chemical Workers Union v Afrox Ltd 10 where it was held that;

“It is implicit in the terms of section 189(2) that an employer, apart from taking part in the formal consultations on the aspects set out in the section, should also take substantive steps on his or her own initiative to take appropriate measures to avoid the dismissals; to minimize the number of dismissals; to change the timing of the dismissals; to mitigate the adverse effects of the dismissals; to select a fair and objective method for the dismissals and to provide appropriate severance pay for dismissed employees.”

⁹ Labor Revision No. 467/2019

III. Criteria for selecting an employee for retrenchment

When an organization undergoes retrenchment, it must establish fair and objective criteria for selecting employees to be laid off. The following are common method which have been used by many company when facing retrenchment;

a). Last in, First Out (LIFO)

This principle means that employees who joined the organization most recently are the first to be retrenched. It is based on the idea that long-serving employees have more experience and a stronger connection to the company. However, LIFO may not always be the best approach if the recently hired employees possess critical skills or expertise that the company still needs.

b). Retention of key job experience & special skills

Companies may override LIFO if certain employees have specialized skills or critical experience necessary for business operations. Retaining employees with essential knowledge helps maintain productivity and prevents disruption to key projects.

c). Employee Qualifications

Retrenchment decisions may also be based on employee qualifications, meaning those with higher expertise, certifications, or training may be retained over those with fewer credentials. This ensures that the company retains a competent and skilled workforce to continue operations efficiently.

¹⁰ [1999] ZALAC 8; (1999) 20 ILJ 1718 (LAC) (Afrox).

IV. The timing of retrenchment; Meaning and Best Practices

Meaning of Retrenchment Timing

The timing of retrenchment refers to the specific period when an employer decides to implement job cuts. Choosing the right time is crucial to minimize the negative impact on both employees and the business. Poorly timed retrenchment can lead to legal disputes, low employee morale, and operational disruptions. To ensure a fair and smooth retrenchment process, the employer should consider the following:

a). Plan in Advance

Retrenchment should be well-planned, with proper assessment of financial conditions and alternative solutions before making the final decision.

b). Comply with Legal and Contractual Obligations

Employers must adhere to labor laws, employment contracts, and collective agreements regarding the notice period, severance packages, and consultation requirements. They should notify relevant labor unions or employee representatives where applicable.

c). Choose the Right Period

Avoid retrenchment during peak business periods when employee reduction might harm productivity. If possible, schedule retrenchment at the end of the financial year or after critical projects are completed to minimize disruption.

d). Provide Adequate Notice

Employees should be given sufficient prior notice before termination to allow them time to prepare for job loss. The notice period should comply with labor laws or employment contracts.

e). Offer Support Programs

Employers should provide counseling, severance packages, and job placement assistance to affected employees. Career transition support helps reduce the negative impact on retrenched workers.

f). Communicate Transparently

Employers must clearly explain the reasons for retrenchment, the criteria used, and available support options. Honest and compassionate communication maintains trust and reduces resentment among remaining employees.

Proper retrenchment timing ensures a legally compliant, ethical, and smooth transition for affected employees while minimizing disruptions to business operations. Employers should strategically plan and communicate openly to handle the process fairly and professionally.

V. Severance pay and other condition on which termination took place Compensation

Whenever the contract of employment is terminated for any reasons, the employee is entitled to benefit under Sect 44 of the Employment and Labour Relation Act, this also apply when the employee is terminated for retrenchment reasons, therefore the employees are entitled to the following benefits: –

a). Remuneration for work done before termination

An employee is entitled to remuneration for work performed before termination, which includes wages, salaries, overtime pay, commissions, and any other earnings accrued up to the last working day. The payment must comply with the terms of the employment contract, company policies, and applicable labor laws.

b). Payment in lieu of notice

Section 41(1) of the Employment and Labor Relations Act outlines the notice requirements for termination. If termination occurs within the first month of employment, the employer must give at least seven days’ notice. For employees working on a daily basis, the required notice period is four days, while those employed on a monthly basis are entitled to twenty-eight days’ notice.

The length of the notice period may also be determined by the terms of the employment contract. If an employer terminates the contract abruptly without adhering to the notice requirements, they are obligated to pay the employee at least one month’s salary. However, if the employer complies with Section 41 by providing the required notice, no additional payment is necessary.

In cases of retrenchment, employers are expected to issue a formal notice of retrenchment. If such notice is properly given, the employer is not liable for additional compensation related to termination notice.

c). Severance pay

Sect 42 (1) of the Employment and labor relation act provide for severance payments to mean an amount at least equal to seven days’ basic wages for each completed year of continuous service with that employer up to a maximum of ten years. The employer is obliged to pay the severance pay as provided under law and not otherwise.

d). Leave accrued but not taken

When an employee is terminated, they are entitled to payment for any unused annual leave they have accrued but not taken. This payment ensures that employees are compensated for their earned but untaken leave days, as required by labor laws and employment contracts. This condition emanates from Sect 31 (1) of the employment and labor relation act which provide the requirement of leave to each employee.

e). Repatriation cost

Section 43 of the Employment and Labor Relations Act provides that employees recruited from one location to work in another are entitled to repatriation costs upon retrenchment. If an employee’s contract is terminated in a place different from where they were originally hired, the employer is legally required to cover the cost of returning them to their place of recruitment. These costs typically include transportation expenses for the employee and their dependents, as well as reasonable relocation allowances where applicable.

f). Certificate of service

A retrenched employee is entitled to a Certificate of service as mandated by Section 44(2) of the Employment and Labour Relations Act. This certificate serves as an official record of the employee’s tenure and must include details such as the employee’s name, the position held, the duration of employment, and a brief description of their duties. The certificate does not include reasons for termination or negative remarks that could hinder future employment opportunities. It is an important document that helps the employee secure new job opportunities by verifying their work history and experience.

V. Severance pay and other condition on which termination took place Compensation

a). Remuneration for work done before termination

b). Payment in lieu of notice

c). Severance pay

d). Leave accrued but not taken

e). Repatriation cost

f). Certificate of service

8. CONSEQUENCES OF UNFAIR RETRENCHMENT

In Zeda Car Leasing (Pty) Ltd t/a Avis Fleet v Van Dyk 11

“The Labor Appeal Court reiterated that an employer must follow a fair procedure in dismissing employees for operational requirements, and that the failure to do so exposes the employer to pay a penalty in the form of a solatium. It was further added that the determination of the quantum of compensation requires the court to apply a discretion taking into account a variety of factors, including the extent of the deviation from a fair procedure; the employee’s conduct; the employee’s length of service; and the anxiety and hurt caused to the employee as a consequence of the employer not following a fair procedure. It was however added that to the extent that an award of compensation must be “just and equitable in all the circumstances”,

¹¹ 10, 0 [2020] ZALAC 4; [2020] 6 BLLR 549 (LAC); (2020) 41 ILJ 1360 (LAC).

In Sefiwa Josephine Phaladi and Afri Guard (Pty) Ltd, the court gives reasons for compensation i.e.

“In considering compensation as a result of these procedural lapses, it is taken into account that (i) the applicant would not ordinarily have been entitled to severance pay in view of the provisions of section 41(4) of the BCEA and further based on the contents of the notice of termination to which she had attached her signature; (ii) that she was served with a section 189(3) notice at the time that she was due to take study leave; (iii) that there was no history of poor performance or besmirched disciplinary record; and (iv) that she is as at the time of this hearing still unemployed, had to rent out her property and stay in a back room, and is financially indebted, which invariably causes her anxiety and hurt. In the light of these considerations, and having further taken account of what is in the interests of both parties, it is determined that compensation equal to four months’ salary is deemed to be just and equitable in the circumstances”

Both cases underscore the importance of employers adhering to proper retrenchment procedures. Unfair retrenchment can lead to significant consequences, including the payment of severance and compensation to the affected employee. These decisions highlight that the failure to follow fair procedures not only exposes the employer to legal claims but also the emotional and financial harm caused to the employee, which must be considered in determining appropriate compensation. Therefore, employers must be meticulous in following the correct retrenchment processes to avoid such outcomes and ensure that compensation is just and equitable for all parties involved.

DISCLAIMER

This insight is not conclusive or binding on any individual. It serves as informative notes for guidance purposes only. The author does not bind any person to the content therein and it does not constitute professional advice. You should not act solely based on the information contained in this publication without obtaining specific professional advice.

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