19 April 2021 by and Business Rescue, Restructuring & Insolvency Newsletter

Employees Terms and Conditions of Employment – Are they written in stone under section 136 of the Companies Act

With the uptick in business rescues over the last year in South Africa, largely owing to the COVID-19 pandemic and the repercussions thereof, we have seen the courts grappling with many aspects of Chapter 6 of the Companies Act 71 of 2008 (the Act). A pertinent issue that has been at the fore of late is the interplay between the duties of a business rescue practitioner (BRP) in rehabilitating the business, and that of the rights of employees in the business rescue process.

In considering a BRP’s task and obligation of having to balance the rights of all stakeholders, with further impositions of the decisions which have arisen out of labour laws in respect of employees’ rights during this process, this task has become more onerous over the years as the law continues to develop.

Section 136 (1)(a)(ii) of the Act essentially provides that the terms and conditions of employment for the employees of a company under rescue may not be amended during business rescue, except where the employees have agreed to such amendment in accordance with the applicable labour laws. At first glance, it seems clear that a BRP is entirely prevented from effecting changes to the terms and conditions of employment for the employees of a company under rescue. However, in the recent case of National Union of Metal Workers of South Africa and Others v Aveng Trident Steel (a division of Aveng Africa (Pty) Ltd) and Another 2020 ZACC 23 (Aveng), the Constitutional Court (CC), outside a business rescue, confirmed that employers may, in certain circumstances, change the terms and conditions of their employees’ employment where there is a genuine operational requirement, and as an alternative to retrenchment.

In this article we consider whether the CC’s findings in Aveng creates an exception to the seeming prohibition contained in section 136(1)(a) of the Act, by allowing a BRP, when stepping into the shoes of the employer, to implement changes to terms and conditions of employment during business rescue, and if so, under what circumstances.

In Aveng the employer experienced economic difficulties and needed to restructure its business in order to survive and remain profitable. As part of its restructuring, it entered into a retrenchment process under section 189A of the Labour Relations Act (LRA). It was not sufficient for the employer to merely reduce its staff compliment, but it required an improvement in productivity and a lower cost base. During the retrenchment consultation process, the employer presented NUMSA with a new business model including redesigned jobs, which would mean changing the employees’ terms and conditions of employment, as an alternative cost-saving measure to retrenchment. The consultation process was fraught with delays and obstacles which subsequently led to the employer and NUMSA reaching an impasse as to acceptable alternatives to retrenchment. The employer proceeded to implement the proposed change in the terms and conditions and dismissed those employees who did not accede to the new terms on the basis of its operational requirements.

Aggrieved by the employer’s actions, NUMSA pursued legal recourse. It claimed that the employees were dismissed because they refused to accept the employer’s demand in respect of a matter of mutual interest (changes to service conditions) and that the dismissal was accordingly automatically unfair under section 187(1)(c) of the LRA. After being heard by both the Labour Court and the Labour Appeal Court (LAC), the matter proceeded to the CC. Ultimately, the CC found, given the particular circumstances, that where an employer has dismissed its employees as a result of their refusal to accept proposed changes to their terms and conditions of employment, as an alternative to retrenchment and as part of a business restructuring to meet its operational needs, such dismissal will be for a fair reason; and not constitute a contravention of section 187 (1)(c) of the LRA.

It is important to note that in the Aveng case the new operating model and redesigned jobs did not result in a reduction of remuneration for the employees.

In handing down this judgement, the CC made the following noteworthy remarks in respect of implementing changes to terms and conditions of employment as a result of a section 189 process:

  • In an ever-changing economic climate characterised by increasing global competition, operational reasons not only relate to the downsizing of the workforce, but also to restructuring the manner in which an existing workforce carries out its work.
  • Restructuring entails a number of possibilities, including shift system duties; adjusted remuneration; and merging of jobs or duties. Generally, businesses that adapt quickly will survive and prosper. Those that do not, will decline and fail.
  • Realising its predicament, the employer in Aveng engaged with its employees through NUMSA regarding a change in the terms and conditions through a structured consultative process.

A BRP should be aware that a change to terms and conditions of employment may be considered and could be necessary during a business rescue. Employees may also reject such proposed changes. However, just as in Aveng, the commercial reality remains that such changes may be necessary in order for the company to be rescued. In our experience, in many instances a change to service conditions of employees is a viable option in a rescue.

However, the question is whether, in view of the provisions of section 136(1)(a), a BRP is prevented from unilaterally implementing such changes where they are genuinely operationally required and have been rejected by the employees? The CC in Aveng specifically dealt with employers’ (as opposed to BRPs’) ability to unilaterally implement changes to the terms and conditions of employees’ employment, and was accordingly not faced with considering what impact (if any) section 136(1)(a) of the Act had on this ability.

Considering that the BRP effectively steps into the shoes of the employer during business rescue, and that the purpose of business rescue is to restructure the company in accordance with its operational requirements, we are of the view that where an employer is entitled to unilaterally implement changes to terms and conditions of employment as an alternative to retrenchment; that a BRP has the same prerogative and is not constrained by section 136(1)(a) of the Act. This is especially so, since a company under business rescue is more likely to have genuine and bona fide economic reasons to do so.

Accordingly, a BRP should be entitled, under certain circumstances, to unilaterally implement a change in the terms and conditions of employment where:

  • they have proposed a change in the terms of conditions of employment as an alternative to retrenchment to the employees, during an exhaustive consultative process; and
  • such changes are genuine and arise from bona fide operational requirements of the company under rescue.

CDH was involved in the Aveng matter from the stage of the Labour Court through to the CC as the second affected employer.

Considering the now well-known LAC finding in South African Airways (SOC) Limited and Others v National Union of Metalworkers of South Africa obo Members and Others [2020] JOL 47663 (LAC) (SAA) that a retrenchment process may only be embarked on during business rescue where it has been contemplated in the business rescue plan, if a BRP foresees that a change in the terms and conditions of the employees’ employment may be necessary during business rescue, the BRP must ensure that the possibility of a retrenchment is provided for in the business rescue plan, as a change to conditions of service occurs within such process.

The number of recent cases emanating out of the Labour Courts highlights the importance of a BRP also considering our employment laws, at the early stages of the overall business analysis when planning possible rescue scenarios.

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