Legal implications of retrenchments in light of the sale of a business

sale of business
16 Mar 2020

Employees are often faced with the fear of retrenchment when a company is being sold or when a company embarks on a restructuring exercise. The Labour Relations Act No. 66 of 1995 (“LRA”) makes provision for such scenarios and provides employees with the necessary protection.

Section 197 of the LRA states the following –

If a transfer of a business takes place (“Transfer”):

  • the new employer is automatically substituted in the place of the old employer in respect of all contracts of employment in existence immediately before the date of Transfer;
  • all the rights and obligations between the old employer and an employee at the time of the Transfer continue in force as if they had been rights and obligations between the new employer and the employee;
  • anything done before the Transfer by or in relation to the old employer, including the dismissal of an employee or the commission of an unfair labour practice or act of unfair discrimination, is considered to have been done by or in relation to the new employer; and
  • the Transfer does not interrupt an employee’s continuity of employment, and an employee’s contract of employment continues with the new employer as if with the old employer.

Section 187(1)(g) of the LRA renders the dismissal of an employee for any reason associated with the Transfer, automatically unfair. The dismissal around a Transfer in this instance can escape an unfair dismissal only in terms of section 187(1)(g) of the LRA, where a bona fide operational need exists.

In the case of SA Chemical Workers Union and Others v Afrox Limited, the court drew a distinction between when a dismissal is a lawful response to an employer’s operational requirements in terms of section 189 of the LRA (“Operational Requirements Dismissal”) and when a dismissal is automatically unfair.

In this case the court established a 2 (two) stage enquiry to determine the true reason for the dismissal of the employees (“Afrox Test”).

The first step of the Afrox Test is an objective and factual enquiry to determine the reason for the dismissal and the employer’s motive, if the reason is in any way related to the Transfer, such dismissal will be automatically unfair. It is therefore necessary to determine whether the dismissal would have occurred if there was no Transfer?

If yes, then the dismissal is not automatically unfair. If the answer is no, the dismissal will not be immediately rendered automatically unfair and the court will look at the second step in the Afrox Test. This second step is used to determine whether such Transfer was the main or dominant cause of the dismissal. In the event that the most probable cause for the dismissal was in any way related to the Transfer, the dismissal will be automatically unfair as a causal link exists.

In order to dismiss employees fairly in terms of Operational Requirements Dismissal around a Transfer, the dismissal must be based on the bona fide operational needs of the business of the “new” employer. Operational requirements are based on the economic, technological and structural needs of the business or the “new” employer –

  • economic needs include drop in sales or services of the “new” employer, or closure of business;
  • technological needs include new technology developments that can replace employees; and
  • structural needs include restructuring of the business.

The dismissal procedure for Operational Requirements Dismissal is as follows, the employer must –

  • consult with the employees, the employees’ workplace forum, registered trade union or elected representatives (“Consulting Employees”) who are likely to be affected by the retrenchment (“Consultation”);
  • together with the Consulting Employees engage in a consensus-seeking process and attempt to reach consensus on the following –
    • appropriate measure to avoid dismissals, minimise the number of dismissals, change the timing of the dismissals and to mitigate the adverse effect of the dismissals;
    • the method for selecting the employees to be dismissed; and
    • the severance pay for dismissed employees;
  • issue a written notice inviting the Consulting Employees to consult and disclosing all the necessary information for such Consultation, but not limited to –
    • reasons for the dismissals;
    • the alternatives that the employer considered before proposing the dismissals and the reasons for rejecting each of those alternatives;
    • the number of employees likely to be affected and the job categories in which they were employed;
    • the proposed method for selecting which employees to dismiss;
    • the time when or the period during which the dismissals are likely to take effect;
    • the severance pay proposed;
    • any assistance that the employer proposes to offer the employees likely to be dismissed;
    • the possibility of the future re-employment of the employees who are dismissed;
    • the number of employees employed by the employer; and
    • the number of employees that the employer has dismissed for reasons based on operational requirements in the preceding 12 (twelve) months; and
  • select the employees to be dismissed according to selection criteria agreed to by Consulting Employees; or if no criteria have been granted, criteria that are fair and objective.

After the Consultation process has been exhausted the employer may make its decision to retrench, and then issue a notice of retrenchment to the affected employees. Section 41 of the Basic Conditions of Employment Act No. 7 of 2008, provides for severance pay when an employee is dismissed due to Operational Requirements Dismissal.

Retrenchment is inevitable and forms a part of the corporate world, employers should therefore ensure any retrenchments are done in accordance with the law to avoid unfair dismissals. Employees should also be aware of the risk associated with retrenchments and be mindful of their rights when retrenchment comes knocking on their door.

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(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)

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