Who says you can’t dismiss expensive staff? Welcome to the employer’s secret weapon – Clause 189 of the LRA

6th August 2013 by Alec Hogg, Moneyweb

South African Labour Legislation was copied from the old West Germany. A country which, on reunification with the East, promptly dropped many of its laws because the legislators knew they were unworkable in the “developing economy” environment the nation now faced. In South Africa, a combination of ignorance, complacency, political expediency and sheer bloody mindedness means the country stuck with its First World labour laws. So every day the labour:capital ratio worsens and ranks of the unemployed swells. Employers vote with their rational feet – and because you cannot fire those you hire, use machines or outsourced alternatives where labour was previously applied. Another rational result of the crazy labour legislation has been the critical role labour consultants now play in SA businesses. In Australia, executives don’t move without their lawyers. In SA, it’s the labour consultant. For more than a decade at Moneyweb, Rael Solomon was mine. A no-nonsense bulldog, he knows the practical application of SA labour law better than anyone else I know. In this blog, he shatters a widely held myth that senior employees enjoy effective lifetime employment. – AH

By Rael Solomon*

Retrenchment is dismissal of redundant employees based on the Company’s Operational requirements. Dismissal can be achieved by a simple consultation process. This can apply to managers, directors and even minority shareholders just as much as it does for general workers and labourers.

Retrenchment leaves the targeted employees with the choice of a much lower salary and a new job description or, alternatively, retrenchment.

Rael Solomon: An engineer turned labour consultant whose practical head steered Moneyweb, and me, through turbulent legal waters for more than a decade.

Retrenchment is defined as a “no fault dismissal” and is done to optimize the company’s operations and overheads. Making a loss is not a prerequisite.

Retrenchment follows a consultation process which can be easily defended if the reasons are valid and the Clause 189 specified procedures strictly followed.

One of the most powerful tools in the hands of an employer is Clause 189 of the Labour Relations Act (LRA). Many middle to senior level employees pass their “Sell by Date”. But to avoid confrontation, companies often keep them at great cost. Efficiency and profitability suffers.

These expensive and no longer productive staffers are treated like Royal Game. Mostly because of an impression that such employees are protected by Labour Legislation. Nothing could be further from the truth.

To address this, as a first step the Employer needs to examine the company’s Operational Requirements in relation to the proposed business model. Few such models have a place for the targeted, usually overpaid employee.

Minority shareholders who have been stripped of their employment status are left with shares and very often no dividends. In this situation the shares have a nominal to fair market value at the discretion of the majority shareholder. The Memorandum of Incorporation (MOI) of the company must be taken into account.

RED LEAVE OUT AT THIS STAGE

The procedures to be followed in detail are dictated by Clause 189 of the LRA. Here is a step-by-step approach:

  • A first consultation should be held with the employee to explain why their position in its current format may be redundant.
  • You should, together with the employee, examine the company’s operational requirements. Suggestions of alternative positions should be canvassed.
  • A copy of Clause 189 of the LRA should be given to the employee and followed during the consultation process. Retrenchment is a “no fault” dismissal and the performance or behaviour of the employee should not be raised as an issue. The case for the redundancy must be related solely to the company’s requirements and operations.
  • Minutes of the consultation should be kept by the employer and copied to the employee. Alternatives to retrenchment should be discussed.
  • A letter should be issued to the employee inviting him to further formal consultations. They, he should be given the opportunity to make suggestions of alternative positions, in writing if possible. The employer should advise of alternative positions considered.
  • This advice, known as a Clause 189 letter, should summarise the procedures being followed in terms of the Act. It should stipulate the criteria being used to explain why the employee is being considered for retrenchment:

LIFO – Last In – First Out: Skills , Experience, together with the redundancy of his position.

  • LIFO enables the employee to suggest alternative positions where the current occupier of this position has been with the company for less time, all other criteria being equal.
  • The letter should include details of the termination package in the event of him being retrenched:

Salary to last working day; one week’s remuneration for each completed year of service; holiday pay due, notice (he may be paid in lieu of notice or be requested to work the notice).

  • A tax directive from SARS should be requested as retrenchment packages could be exempt from tax.
  • After the consultation process has been exhausted, preferably with the help of an experienced person, the employee may be dismissed.

The key to the success of the retrenchment of a senior employee is transparency, consultation, keeping detailed records and having the employee’s responses in writing.

* Rael Solomon Pr Eng is a professional engineer who specialises in labour and business law. You can email him direct at info@seorg.co.za

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