12 February 2014 by Cliffe Dekker Hofmeyr

Adcorp Employment Index - Alternatives to retrenchment

The latest Adcorp Employment Index (January 2014) indicates that the South African economy lost 36 290 jobs during January 2014. It also states that retrenchment levels in South African businesses are at a ten year high. Unemployment, according to StatsSA, sits at 24.1% (or 4.8m people actively looking for work being unable to find jobs).  

Johan Botes, Director in the Employment Practice at Cliffe Dekker Hofmeyr says that with this news, businesses now need to take urgent steps to accommodate changes in their operating environments.

“With low GDP growth (1.9%) casting a gloomy view over the business road many organisations are resorting to retrenchment of employees to curb operating costs.  With labour costs being a significant aspect of most businesses, cutting the cost of employment often has direct and meaningful impact on the business. Or, at least, that seems to be the prevailing view.

“But is shedding jobs the best avenue to follow for businesses adjusting to depressed market conditions, let alone for a country struggling to find employment for a group that is larger in number than the population of Johannesburg?,” he asks.

Botes explains that resorting to retrenchment as a default solution to managing the books is, at best, a strategy of limited application.

“There can be no doubt that businesses that have outgrown the need for certain skills or do not have sufficient work to keep all staff gainfully employed have the legal prerogative to restructure the business, even where this lead to redundancy of positions. However, where the reason for the proposed retrenchment relates to cutting costs employers should consider the secondary impact of using retrenchments to achieve the cost savings. Considering alternatives to retrenchment could have a positive impact on the business and its employees in the long run.

“The Labour Relations Act compels an employer (and other consulting parties) to consider appropriate measures to avoid retrenchment, to minimize the number of such dismissals, to change the timing of the dismissals and to mitigate the adverse effects of the dismissal. In addition to the legal imperatives, there are also a number of negative consequences to retrenchment which may take the gloss out of the financial saving or envisaged operational efficiencies,” he says.

“The direct saving occasioned by cutting an employee’s salary from the payroll may not be a true reflection of the actual saving that will be achieved.

“Various hidden costs of retrenchment cut into the envisaged savings the organization set out to realize when planning the retrenchments. Some of the hidden costs that are typically not included when calculating savings resulting from retrenchments include overtime payments; the cost of errors when experienced employees are lost; the loss of staff and subsequent decrease in staff morale; the loss of customers who were loyal to a certain employee or because of employee negativity and the future costs of recruiting new staff when the business grows again,” he notes.

“Businesses keen to explore achieve cost savings in manners other than reducing staff compliment could consider, for example, a reduction in remuneration; changing the terms and conditions of employment of employees; elimination of overtime and reduction in working time; voluntary termination; forced annual leave, and the redeployment or transfer of employees, ” he explains

“Where such suitable alternatives exist, it presents the added advantage of virtually eliminating the need to pay severance pay if the employee unreasonably refuses the alternative position. The pure economic benefit of retrenchment is often eroded by hidden cost and unforeseen negative consequences of such action. Linked with the disabling effect it may have on a business’ ability to make full use of positive changes in the markets as and when this arise, employers should carefully consider other alternatives,” Botes adds.

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