Background

In a recent arbitration, the CCMA commissioner considered whether the retrenchment of an employee was substantively and procedurally fair. The employer relied on a group-level restructuring decision taken by its foreign parent company and implemented locally.

The evidence showed that the South African entity was not experiencing financial difficulty, the employee’s salary was paid locally, while her services benefited the global organisation for free, and the decision to reduce headcount was effectively taken at parent-company level and implemented in South Africa. Crucially, there was no proof of other retrenchments at the global level. There was no consultation on the rationale, the selection criteria or alternatives to retrenchment before the decision to dismiss was taken, meaning the consensus-seeking process required under section 189 of the Labour Relations Act 66 of 1995 (LRA) was found wanting. These facts became central to the commissioner’s analysis.

Key findings

Operational requirements of the local undertaking

The commissioner reiterated that dismissals for operational requirements must be based on the local undertaking’s economic, technological, structural or similar needs.

A general instruction from a foreign parent company to reduce headcount was held to be insufficient where the local entity could not demonstrate how the dismissal served its own operational needs.

In particular, the commissioner found that the employer’s business case was flawed where the South African business was financially stable, no evidence was presented to show that retrenchment would produce savings for the group, and that no evidence was adduced to demonstrate that the employees position was genuinely redundant at local level.

Consultation must be genuine and not a fait accompli

The award also emphasised that consultation under section 189 of the LRA requires a genuine consensus-seeking process.

Where a decision to retrench has already been taken at global level and is merely implemented locally, consultation risks becoming a formality rather than a meaningful engagement.

The commissioner observed that in the case before her, the decision to dismiss had effectively already been made before the consultation process had commenced, making much of the consultation process a “sham”.

The focus remains on the local undertaking

A recurring theme is that the legal enquiry focuses on the employer in South Africa, not the multinational group as a whole.

Even where group-level restructuring occurs, the South African entity must demonstrate a real operational need within its own business, meaningful consultation on the business rationale and operational requirements of the local business, and evidence supporting the redundancy of the position.

The commissioner further noted that: “international companies doing business in South Africa must follow South African law, and that includes the obligation to consult before deciding to dismiss for operational requirements”.

Absent these elements, dismissals may be found both substantively and procedurally unfair, as occurred in this case.

Business rationale versus operational requirements 

The award serves as a useful reminder of an important distinction between business rationale and operational requirements.

A business rationale refers to the strategic objective an organisation seeks to achieve, such as reducing costs or restructuring operations globally. Operational requirements, by contrast, refer to the concrete operational measures required within a particular employer’s business to achieve that objective.

The reduction of headcount would qualify as an operational requirement where the decision is to reduce operating expenditure and the method chosen is reduction of employee costs.

While a general instruction from a foreign parent company to reduce headcount is, without more, neither a business rationale nor an operational requirement by itself, the existence of a business rationale at group level does not automatically establish operational requirements at subsidiary level. The latter must be independently demonstrated.

Practical takeaways for employers

This award underscores several important principles for multinational employers operating in South Africa:

• Global decisions are not determinative: A group directive to reduce headcount does not, without more, establish operational requirements for a South African subsidiary to justify a local retrenchment in South Africa.
• Local justification is essential: Employers must be able to demonstrate a genuine operational need of the South Africa business.
• Consultation must be meaningful: Consultation must occur before any final decision is taken and must involve genuine engagement on rationale, alternatives, and selection criteria.
• Evidence matters: Employers should be prepared to substantiate the financial or operational basis for retrenchment at the level of the local entity.

Conclusion

For multinational enterprises; South African labour law applies to the South African employer, and where strategic decisions are taken by the foreign holding company ‘on a global scale’ (or affecting serval jurisdictions), such decision must, in fact, translate into a local business rationale, and result in a genuine operational requirement, of the local undertaking (entity’s business).

Careful planning, proper local analysis and genuine consultation remain essential to ensuring that retrenchments for operational requirements withstand scrutiny.