OPERATIONAL REQUIREMENTS AND SUBSTANTIVE FAIRNESS

The return of economic rationale

Once upon a time (it now seems long, long ago), the Labour Court showed considerable reluctance to investigate an employer’s business reasoning when embarking on a retrenchment or other operational requirements dismissal. It seemed that compliance with the procedural guidelines set out in section 189 of the Labour Relations Act formed the focus of the Labour Court and the Labour Appeal Court’s decisions for a very long time. The leading case in this regard remains Johnson & Johnson Ltd v CWIU (1998) 7 LAC 5.2.6 — in this case the Labour Appeal Court held that the objective of the procedure is for the employer and the employee-representatives to engage in a joint consensus-seeking process.
The reluctance to second-guess the employer’s commercial and business thinking remained for some time. In SACTWU & others v Discreto (A Division of Trump & Springbok Holdings) (1999) 8 LAC 5.3.1 this hands-off approach was expressed in the following terms:
‘For the employee fairness is found in the requirement of consultation prior to a final decision on retrenchment. This requirement is essentially a formal or procedural one, but, as is the case in most requirements of this nature, it has a substantive purpose. That purpose is to ensure that the ultimate decision on retrenchment is properly and genuinely justifiable by operational requirements or, put another way, by a commercial or business rationale.’ (paragraph [8] of the judgment).
This view also had certain implications for the way in which the Labour Court was to approach the issue of substantive fairness in the context of operational requirements dismissal. The Labour Court held that it was not the function of the court to ‘second-guess’ the commercial or business efficacy of the employer’s ultimate decision (an issue, the Labour Appeal Court added, the court was not generally qualified to pronounce upon). The function of the court was to pass judgment on whether the employer’s ultimate decision to dismiss was a genuine decision and not merely a sham:
‘The manner in which the court adjudges the latter issue is to enquire whether the legal requirements for a proper consultation process has been followed and, if so, whether the ultimate decision arrived at by the employer is operationally and commercially justifiable on rational grounds, having regard to what emerged from the labour consultation process. It is important to note that when determining the rationality of the employer's ultimate decision on retrenchment, it is not the court's function to decide whether it was the best decision under the circumstances, but only whether it was a rational commercial or operational decision, properly taking into account what emerged during the consultation process.’ (also paragraph [8]).
This meant that there was still room for the employer to make its business decisions (whether they were good or bad) and all the court focused on was whether that decision was related to commercial or operational necessities faced by the employer.
No more deferential approach
In the context of review of CCMA arbitration awards, the fundamental question is whether a CCMA commissioner’s award is ‘rationally justifiable’. With this concept in mind, the Labour Appeal Court in 2001 indicated that a sound commercial rationale for a decision to retrench may also be required and that the hands-off approach was no longer good enough.
In BMD Knitting Mills (Pty) Ltd v SACTWU (2001) 10 LAC 7.19.1 the Labour Appeal Court made the following famous statement:
‘The word "fair" introduces a comparator, that is a reason which must be fair to both parties affected by the decision. The starting point is whether there is a commercial rationale for the decision. But, rather than take such justification at face value, a court is entitled to examine whether the particular decision has been taken in a manner which is also fair to the affected party, namely the employees to be retrenched. To this extent the court is entitled to enquire as to whether a reasonable basis exists on which the decision, including the proposed manner, to dismiss for operational requirements is predicated. Viewed accordingly, the test becomes less deferential and the court is entitled to examine the content of the reasons given by the employer, albeit that the enquiry is not directed to whether the reason offered is the one which would have been chosen by the court. Fairness, not correctness is the mandated test.’ (paragraph [19])
In terms of this view, the Court could (and would) enquire as to the employer’s reasoning in making the decision to retrench — the Court would consider not only whether there was an economic rationale for the decision, but also whether there was a ‘reasonable basis’ for the employer’s decision-making process. Still, however, the enquiry appears at this stage to be not whether the employer’s decision is the ‘correct’ decision (one the Court would have chosen). In other words, some respect for the employer’s decision-making process remained in place.
More recent decisions have confirmed that the Labour Appeal Court can, and will, consider the employer’s business decisions in some detail and even measure these against what the Court perceives as being ‘common sense’. An important judgment in this regard is CWIU & others v Algorax (Pty) Ltd (2003) 12 LAC 5.2.6. Sometimes, the Labour Appeal Court noted, it is said that a court should not be critical of the business solution found by an employer, simply because the Court will not have the business knowledge required. But, while this statement is true, the LAC continued, it should not be taken too far. In objectively considering the fairness of a dismissal, a court should not defer to the employer in answering the question as to whether the dismissal is fair or not.
But here, unobtrusively, the Labour Court goes a small (but vital) step further:
‘Furthermore, the court should not hesitate to deal with an issue which requires no special expertise, skills or knowledge that it does not have but simply requires common sense or logic, especially where the employer has had an opportunity of commenting on such an issue and has not said anything that indicates that any special knowledge or expertise required. This is such a case. The respondent’s problem required simple common sense and did not involve any complicated business transaction or decision.’ (paragraph [70])
Recent cases in the LAC and the CCMA
An interesting and important recent decision of the Labour Appeal Court relating to substantive fairness in the context of operational requirements dismissal is Enterprise Foods (Pty) Ltd v Allen & 11 others (2004) 13 LAC 1.11.7. The Labour Court had held that the employer’s decision to close one plant was directly linked to a shareholder demand for a 25% return on their investment. The Labour Court found that the employer could not explain why a 25% return on investment was operationally required and that therefore the employer’s reason for closing the plant (leading to the retrenchment of 733 employees) was neither operationally required nor fair. Affirming the approach set out in the Algorax decision (and quoted above), the Labour Appeal Court came to the conclusion that there were objective reasons for the restructuring of the employer’s organisation. It was held that the dismissals were not substantively unfair.
Now even the CCMA is having to deal with these issues. In a CCMA award that only recently made its appearance on IRNetwork, Rhonda Watson / Vincemus Investments t/a Kempston Truck Hire (2004) 13 CCMA 5.3.3, the employee argued that there had been no economic rationale for her retrenchment, while the employer claimed that her post had become redundant and that the decision was based on an objective economic rationale. An interesting award, because the CCMA commissioner finds that the employee’s dismissal had been procedurally fair, but substantively unfair. There was, the commissioner concluded, no economic rationale for the employee’s retrenchment, and the dismissal was motivated by other factors, namely problems between the employee concerned and her co-workers. It therefore seemed that it was a misconduct matter instead of an operational requirements issue. Money, it was clear, played no role in the employee’s retrenchment — the employer would not profit (in a financial sense) for restructuring the employee’s post.
Presenting a business case
It is clear that, in disputes over operational requirements dismissals, employers must do considerably more than merely indicate compliance with the procedural steps outlined in section 189 of the Labour Relations Act. Increasingly, it seems, the Labour Court and the Labour Appeal Court requires employers to present evidence relating to how a certain business decision had been taken, what the employer’s reasoning was, and, especially, what alternatives were considered and why these alternatives were not applied instead of resorting to dismissal. When it comes to large-scale retrenchments, section 189A(19) now requires a court to consider whether a retrenchment was economically justifiable on rational grounds — in this specific case, the approach of the Labour Appeal Court has now been turned into legislation.
In some cases the Labour Court and the Labour Appeal Court may still be reluctant to second-guess the employer’s business decisions (especially if technical or expert knowledge is required), but in many instances, employers may find themselves measured against the Court’s standards.