Using cost to company and overstaffing as retrenchment criteria

Section 189 of the Labour Relations Act, No 66 of 1995 (Act) regulates the retrenchment of employees, with the emphasis on the retrenchment procedure as opposed to the substance of a proposed retrenchment of employees. The Act does not provide selection criteria for proposed retrenchments but requires parties to consult with a view of reaching agreement thereon.

As most retrenchments are for economic reasons, many employers prefer the cost to company selection criterion. Notwithstanding the above, the employer must show that the retrenchment is both substantively and procedurally fair.

The court in Food And Allied Workers Union and Others v Cape Hospitality Services (Pty) Ltd t/a Savoy Hotel (C419/2007) [2015] ZALCCT 51 (18 August 2015) 35 ILJ 3394 LC was faced with a question of unfair retrenchment on the basis that there was no consultation with the affected employees, nor with their trade union, and the selection criteria was not justifiable.

The employees sought reinstatement. The employer had retrenched them on the basis that it was necessary to cut costs in the business. It must be noted that at the time of retrenchment the employees earned less than R3000 per month. The employer alleged that it held a meeting with the employees but not with the trade union (FAWU) because the union did not have majority membership. At the meeting, the employer claimed to have explained the financial position of the company and the possibility of retrenchments. The employer adopted cost to company and being overstaffed as the selection criteria.

The court interrogated all the above issues and held that the notion that the retrenchment of two employees who earned less than R3000 per month was critical to the operational costs of the company was unconvincing.

The court also held that the understanding that an employer has a duty to only consult with the union which has majority membership is incorrect in law. In line with the hierarchy of consultation provided in s189(1)(b)(ii) of the Act, in the absence of a collective agreement and a workplace forum, the employer is required to consult with the registered trade union whose members are likely to be affected by the proposed dismissals. The union in question, FAWU, had long since been recognised as a representative union and the employer was obliged to consult with it.

Turning to the selection criteria, the employer adopted cost to company and being overstaffed as the criteria. On the point of cost to company, the court looked at the fact that the employees were only earning R3000 per month. On the point of being overstaffed, the court looked at the fact that the employer was advertising for a chef in the same department where the employees were dismissed.

The court found the retrenchment to be both procedurally and substantively unfair as there was no evidence to prove the meeting with the employees took place and because the selection criteria was not justifiable; the court ordered reinstatement with back-pay.

Although LIFO is the most commonly chosen selection criterion, the cost to company and being overstaffed criteria are acceptable but only if they are justifiable on the facts and such criteria must be a result of a joint-consensus seeking process between the employer and the consulting parties as contemplated by s189(2)(b) of the Act. These criteria cannot be adopted unilaterally by the employer as this would result in procedural unfairness.