Labour Court lays down retrenchment rules when a business is under business rescue

15 July 2020,  Sinenhlanhla Khoza 1262
During these difficult economic times, many businesses are experiencing financial distress and have responded thereto by, among other things, getting retrenchment processes underway.
In terms of the Labour Relations Act (LRA), an employer who ‘contemplates retrenchments’ due to his or her operational requirements may issue a notice inviting all affected employees to a consultation. The purpose of the consultation is for parties to attempt to reach consensus on a number of prescribed factors prior to any final decision being taken on retrenchments. The LRA does not prescribe any precondition to be met by such an employer prior to the issue of retrenchment notices. The employer merely has to be contemplating retrenchments due to his economic, structural or other needs of his or her business and must issue retrenchment notices as soon as possible thereafter. This therefore means that the employer has the exclusive prerogative to decide on when to issue retrenchment notices.  

This position has, however, recently been changed when it comes to an employer under business rescue as contemplated by the Companies Act. During business rescue proceedings, the business rescuer assumes management control of the company and subsequently ‘steps into the shoes’ of the employer with regards to all rights and obligations the latter had prior to the start of this process. In the largely publicised court-battle between South African Airways (SOC) Ltd and Others v National Union of Metalworkers of South Africa ( NUMSA) obo Members and Another the Labour Court was faced with a question of when a business rescue practitioner may commence with retrenchments in terms of the Labour Relations Act. 

In interpreting the Companies Act, the Court ultimately held that the need to retrench must be entrenched in the business rescue plan itself and the business rescue practitioner is not empowered to retrench employees in the absence of a business rescue plan - and that doing so, was procedurally unfair. This judgment, which has been confirmed by the Labour Appeal Court, means that an employer who has been placed under business rescue must address the issue of retrenchment in the business rescue plan itself and only issue notices to the affected employees after the business rescue plan has been approved.
In practice, prior to issue of retrenchment notices, employers offer voluntary severance packages to employees who are likely to be affected by retrenchments. In the aforementioned case, NUMSA argued that the offer of voluntary severance packages entails that the employer is contemplating retrenchments which is subject to a consultation process in terms of the LRA. The Courts, however dissented from this view and held that the provisions of the LRA do not prohibit an employer from offering his/her employees voluntary severance packages as a measure to prevent retrenchments and should such an offer be accepted, the employment relationship is terminated by mutual agreement. 

The Labour Court plays a supervisory role in all retrenchment processes instituted by employers. Therefore, should an employer fail to follow any procedure prescribed by the LRA, any party to the consultation process may approach the Labour Court for an appropriate order which may include compelling the employer to comply therewith, interdicting the employer from dismissing the employee until the former has complied with the procedure or awarding compensation to the employee. Such an employee must approach the Labour Court within 30 days of the employer giving notice of termination of employment or if no notice is given, the date on which the employee is dismissed.

Consequently, a business rescuer can only commence with retrenchment process after the business rescue plan has been approved.
Related Expertise: Labour and Employment

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