Retrenchment is one of the most legally sensitive processes a business owner in South Africa will ever have to manage. When operational requirements force a company to reduce its headcount, the Labour Relations Act requires strict compliance with Section 189, and in some cases, Section 189A; failure to do so can expose an employer to costly disputes at the CCMA or Labour Court. For small to medium-sized enterprises (SMEs), where resources and dedicated HR departments are often limited, understanding these requirements is not optional; it is essential to protecting both the business and its employees.
Many SME owners assume that retrenchment simply means letting staff go when times are tough, but the law views it very differently. Section 189 sets out a detailed consultation process that must be followed before any final decision is made, covering everything from the reasons for the proposed retrenchment to selection criteria and possible alternatives to job losses.
Skipping steps, rushing consultations or failing to document the process properly can render a retrenchment procedurally or substantively unfair, regardless of how genuine the underlying business reasons may be.
This article unpacks what Section 189 actually requires of SMEs, when Section 189A applies, and the practical steps business owners need to take to remain compliant while managing a difficult commercial reality.
What is Section 189?
Section 189 of the South African Labour Relations Act (LRA) sets out the legal process an employer must follow before dismissing employees for operational reasons, commonly known as a retrenchment.
In terms of Section 189(1) of the LRA, an employer must consult with one or more of the following groups:
- Any person an employer is obliged to consult with in terms of a collective agreement.
- A workplace forum (if it exists).
- Any registered trade union whose members are likely to be affected by the proposed dismissals.
- The employees likely to be affected by the proposed retrenchment.
- Employee representatives.
Note: Employers must consider alternatives to dismissals for operational requirements. If they don’t, the dismissals will be found to be unfair.
What Must an Employer Consult On in Terms of Section 189?
The following are some of the things the business owner must consult on before proceeding with retrenchments.
- The reason for the proposed retrenchment.
- The alternatives considered and why they were rejected.
- The number of employees and the job categories affected.
- Severance pay.
- The timing of the dismissals.
- Any assistance to be provided to potentially affected employees.
- The number of employees employed by the business.
- The number of employees dismissed by the employer for operational reasons in the preceding 12 months.
What Information Must Be Disclosed in the Consultation Process?
As the business owner, you will be required to disclose the following information during the consultation process.
You have a duty to disclose:
- All information to the consultant
- Information relevant to the retrenchment
- Organograms
- Organisational structures
- Financial statements
Information that you can refuse to provide includes:
- Information not relevant to the retrenchment
- Trade secrets
- Information not available
- Information that may harm the employer’s business
- Confidential or classified information
What Information Must be Disclosed to Affected Employees?
The employer (you) must issue a written notice inviting the other consulting party to consult with it and disclose in writing all relevant information, including, but not limited to:
- The reasons for the proposed dismissals.
- The alternatives that the employer considered before proposing the dismissals, and the reasons for rejecting each of those alternatives.
- The number of employees likely to be affected and the job categories in which they are employed.
- The proposed method for selecting which employees to dismiss.
- The time when or the period during which the dismissals are likely to take effect.
- The severance pay is proposed.
- Any assistance that the employer proposes to offer to the employees likely to be dismissed.
- The possibility of the future re-employment of the employees that were dismissed.
- The number of employees employed.
- The number of employees that the employer has dismissed for reasons based on its operational requirements in the preceding 12 months.
The employer must allow the other consulting party (employees) an opportunity during consultation to make representations about any matter dealt with above, as well as any other matter relating to the proposed dismissals.
How Much Must the Severance Pay Be?
Employees are entitled to one week’s severance pay for each completed and continuous year of service with the same employer. The employer does not have to pay severance pay if an employee unreasonably refuses to accept an offer of employment with the current employer or another employer (sections 41(2), 41(4) of the Basic Conditions of Employment Act).
How is Severance Calculated?
According to the determination issued by the Minister of Labour in Government Notice 691 of 2003, the following payments are included in an employee’s remuneration for the purpose of calculating severance pay:
- Housing or accommodation allowance or subsidy; or housing or accommodation received as a benefit in kind. Any housing or accommodation allowance or subsidy paid in cash, or the value thereof if paid in kind, is deemed to be part of remuneration.
- Car allowance or the value of the provision of a company car. This does not apply in those instances where the employer provides a vehicle to the employee so as to allow the employee to travel to and from work, with no other private usage of the vehicle by the employee.
- Any cash payments made to an employee, except those listed as exclusions.
- Employer’s contributions to medical aid, pension, provident or similar funds or schemes must be considered as part of the employee’s remuneration and must be included when making calculations in terms of this notice.
- The employer’s contributions to funeral or death benefit schemes also form part of remuneration and must be included in the calculation of remuneration.
- Accumulated annual leave must be paid out.
The following items do not form part of the employee’s remuneration for the purpose of these calculations:
- Any cash payment or payment in kind that is provided in order to enable the employee to work (for example, equipment, tools or a similar allowance, or the provision of transport or the payment of a transport allowance to enable the employee to travel to and from work only).
- A relocation allowance
- Gratuities such as tips from customers and gifts from the employer
- Share incentive schemes
- Discretionary payments not related to the employee’s hours of work or performance, for example, a discretionary profit-sharing scheme.
- An entertainment allowance.
- An education or schooling allowance.
The process of initiating a Section 189 is quite complex. This is to ensure that affected employees are not left without anything to show for their work. Additionally, the process ensures that business owners have done everything possible to avoid retrenchment.
