The need to retrench

The concept of “operational requirements” is a vague one — it is defined in section 213 of the Labour Relations Act (the LRA) as being the employer’s economic, technological, structural or similar needs. In order to be substantively fair, the employer must be able to show that it has a valid and fair operational need that justifies the dismissal; there must, in other words, be a need to retrench. But what does it mean if we say that there must be a need to retrench? One of the implications is that retrenchment is the only viable option left — it is a firmly established principle in our law that dismissal must be the last resort. One of the underlying themes of section 189 and section 189A , for instance, is that the employer and the employees (through their representatives) must try and find workable alternatives to dismissal.

A need to retrench also means that the need must be legitimate. This can be explained as follows: an organisation has employed an administrative official in a certain position for a considerable period of time. She occupies the position as, say, credit manager. But there is a falling out between her and a councillor and she is “retrenched”. Two weeks later, the organisation advertises the post of credit manager in the newspaper. Clearly, there was no need to retrench in this case — the employer obviously requires a credit manager. There were no economic, structural or similar requirements in this case.

Business reasons

The classic, text-book example of a need to retrench is where the employer is suffering losses that endanger the continued survival of the business. In this case, the retrenchment has a real and valid economic rationale — it relates directly to the employer’s need to cut costs and to ensure its short or medium term survival.

Kukard & others v Molapo Technology (Pty) Ltd (2005) 14 LC 7.1.4 is an example of business reasons. The employees were transferred, pursuant to the sale of a business, from one employer to another. Shortly after the transfer, a number of employees were retrenched. As it turned out, one division of the company was a loss-making business, and the union argued that the new employer recklessly purchased the electronics division in question, even though it had not conducted an in-depth due diligent investigation of the business before purchasing it. Did this mean, the Court asked, that the employees were arguing that the reason for the retrenchment was not a bona fide reason?

The seller of the business (Telkom) had not disclosed certain pertinent facts to the buyer of the business, and the result of this non-disclosure was that the new employer, instead of facing a burden of R50 million, would actually suffer a loss of R90 million a year — something it had not budgeted for.

The Labour Court confirmed that a fair reason, in the context of an operational requirements dismissal, means that the employer must show that the retrenchment was aimed at achieving savings — the reason for the retrenchment must be a bona fide business-related reason. In this case, the new employer had to do something drastic and it accordingly took drastic steps: the employer had to turn around the business within a period of two months in order to keep it from bleeding to death. A country-wide restructuring and retrenchment exercise would be necessary. This, the Court found, constituted a genuine reason for the retrenchment: there was a sound business-related need to retrench. And, on the facts before it, the Labour Court did not hesitate to find the retrenchments substantively fair.

Engaging contract workers

Things were slightly different in CWIU & others v Latex Surgical Products (Pty) Ltd (2005) 14 LAC 7.1.3. The employer notified the union that, in order to sustain itself, it had to consider restructuring and downsizing — this could lead to the dismissal of a number of employees. The employer’s “vulnerability” was caused by a number of factors, including turmoil in the financial markets and foreign currencies, increased interest rates, the potential loss of important contracts and pressure on its pricing levels. In its notification to the trade union, the employer estimated that 33 full-time employees at all levels in the company would be affected by the downsizing process and it also proposed a number of selection criteria: key skills, length of service, performance record, disciplinary record, educational requirements and experience. The employer also undertook to give preference to retrenched employees should it need to employ during a 12 month period following the retrenchment.

It was established before the Labour Appeal Court that the company had suffered considerable losses over a number of years. But it was also established that soon after the employees were retrenched, the company employed more than 80 contract or casual employees. This raised the question whether the employer really needed to reduce its workforce — how could the employer say it was dismissing certain employees because it needed to reduce its workforce and yet no sooner had it dismissed them than it employed other employees? During the labour consulting process the company had emphasised the need to downsize and to reduce its workforce — could it be said that there was a need to retrench?

This is what the Labour Appeal Court had to say on this point:

“To the extent that the respondent relied on the need to downsize its operations to justify the individual appellant's dismissal, I find that the respondent has failed to show that there was a reason to downsize. It has failed to show the basis upon which it could be said that it had a reason to downsize because, soon after the dismissal of the individual appellants, it employed about 80 or more contract and/or casual employees who have not been shown to possess any skills which the individual appellants did not have and for whose preference to the individual appellants the respondent has provided no justification. Indeed, Ms Pule's evidence to the effect that the individual appellants could have continued to work for the respondent if they got themselves employed by Workforce or a labour broker is proof that their being dismissed might not or was not connected with the results of the evaluation process conducted by TNMC. It undermines the whole TNMC evaluation exercise.” (at [63])

Its not the first time something like this has happened: in General Food Industries Ltd t/a Blue Ribbon Bakeries v FAWU & others (2004) 13 LAC 5.3.2 the Labour Appeal Court also attached some importance to the fact that the employer was recruiting new employees at a nearby operation, claiming that it had to reduce its workforce to ensure the survival of another operation. What really motivated the employer’s preference for the casual or contract workers was, in part, the fact that personnel-management in respect of these workers remained with the labour broker, lightening the load on the company’s management. It also appeared that a number of permanent employees had refused to work overtime as and when required — the casual or contract employees were only too happy to do so. But this was not raised in the consultation process and, if there had been problems with the permanent employees, these problems should have been addressed through negotiations and a change to their terms and conditions of employment. The Labour Appeal Court also found that the company had not shown that there was a sound reason for it rejecting the union’s proposal for employees to share work or to work short time.

Selection criteria

In terms of the LRA, fair and objective selection criteria must be used if the consulting parties cannot agree to selection criteria. And here the Labour Appeal Court makes an interesting point: the selection criteria agreed between the employer and the trade union in the consultation process may be subjective, but, because the criteria are agreed, the employer will not act unfairly in using these subjective selection criteria in selecting the employees to be dismissed. On the contrary, the employer may well be acting unfairly if it deviates from the agreed (subjective) selection criteria. It is only when the employer uses selection criteria that have not been agreed that the criteria must be “fair and objective”.

“The rationale for this is that the use of agreed selection criteria will not produce a dispute about the fairness of such criteria whereas the use of selection criteria that have not been agreed upon has the potential to lead to dissatisfaction and disputes about such criteria. The whole idea of the consultation process required by section 189 before dismissals for operational requirements can be effected is fairness and the prevention of unnecessary disputes that could otherwise arise if such dismissals occurred without such a process. Obviously, there are many dismissals for operational requirements which do not produce dismissal disputes precisely because of the consultation process required by section 189 and there would be many disputes that would arise if such a process did not occur.” (at [86])

If the employer uses subjective criteria that have not been agreed upon, the selection process may be abused to get rid of employees the employer views as unwanted but against whom the employer cannot produce evidence of misconduct or poor work performance. There is a price to be paid by the employer if he wants to use these subjective selection criteria — the employer must secure an agreement with the other consulting party on the use of these criteria. If the employer strikes a deal, it can proceed to use the subjective selection criteria; if no deal is struck, the selection criteria must be fair and objective.

In the present case, the selection criteria eventually used included qualifications, skills, performance and disciplinary records and years of service. Two interesting criteria also made it onto the employer’s list: the employee’s “willingness” and the results of an interview conducted with the employee. These last two criteria were subjective, the employer admitted, but together they constituted only 20% of the selection ratings: the other “objective” factors together constituted 80% of the selection indications.

Not so, said the Labour Appeal Court: in respect of the interview requirement an employee would get 0% if he did not attend an interview, and he or she would also get 0% if “unwilling”. This meant that an employee could lose up to 20% of his or her total score in respect of the selection criteria on the subjective criteria alone. Taking into account this fact, together with some other issues relating to the way in which the selection criteria were applied, the Labour Appeal Court came to the conclusion that the selection criteria were not fair and objective as required in section 189(7)(b) of the LRA.

Demonstrable need

Dismissal for operational requirements relates to the business needs of the employer, irrespective whether these needs relate to downsizing, restructuring, implementing new technology, or trying to ensure the survival of the business by cutting the wage bill. Not every reason proffered by the employer will constitute a real need to retrench, and there can be little doubt that it will always be suspicious if an employer retrenches and recruits new employees (or employs casual or contract workers) at the same time.