How does retrenchment work? (fair vs unfair retrenchment)

Retrenchment sucks.

No one likes the process. It doesn’t matter which side of the fence you’re on. It’s no fun for employers and especially hard for employees.

Whether we like it or not. Retrenchment is a part of life, and there’s a fair chance that you could go through the retrenchment process yourself.

No matter which side you’re on. This is how retrenchment works.

 

Understanding retrenchment

When times get tough, businesses look toward retrenchment as a way out.

As with any ‘corporate strategy’, retrenchment can be confusing at first. So, we’ll explain it so you can understand.

Let’s start with the definition.

⭐ Bonus: Getting retrenched while in debt can be scary. Follow this strategy to get out of debt on a low income.

 

What is retrenchment?

Retrenchment is a strategy businesses use to reduce expenses to improve financial stability and make the business run more effectively.

Retrenchment normally involves downsizing, lay-offs or selling parts of the business and usually takes place when the business experiences hardship.

• Downsizing = making a company smaller by reducing staff or operations.
• Lay-offs = temporarily or permanently letting employees go.
• Selling parts of the business = self-explanatory

 

Makes sense, right? When a company struggles, it has to do something about it; otherwise, everyone will be out of the job.

 

 

But how does it work, and who decides what happens?

Don’t worry. We’ll explain everything.

 

How does retrenchment work?

Retrenching employees is a serious decision with real consequences. Luckily, it doesn’t all happen overnight. The process shouldn’t be taken lightly.

In South Africa, the Labour Relations Act (LRA) outlines a fair retrenchment process.

The retrenchment process should follow these steps:

1. A written notice is issued
2. Consultation
   1. Disclosure of information
   2. Review alternatives
3. Selection of employees for retrenchment
4. Severance pay and notice
5. Assistance to the retrenched employees
6. Dispute resolution with the CCMA

 

Let’s go over each step.

 

 

A written notice is issued

Employers must notify the relevant parties (trade union, employee representatives, or the employees themselves) as soon as retrenchment becomes a possibility.

The notice should explain why retrenchment might take place and what will be discussed during the consultation process.

 

Consultation:

During the consultation phase, the employer and employees (or representatives) engage in a joint-consensus-seeking process to discuss the cause, other options, severance pay, and the timing.

The primary goal of the consultation is to find another way. Retrenchment should be the last resort.

 

 

Disclosure of information (part of consultation):

During the consultation process, employers should be as transparent as possible. Employees (or representatives) need to be informed so that they can contribute and engage effectively during the consultation.

Important information that should be disclosed may include:

• The reasons for the retrenchment
• Potential alternatives
• Details about who could be affected
• The selection criteria (performance, role, time with the company, etc.)

 

Review alternatives (part of consultation):

If there’s a better way to protect the company, then this is part of the process to mention it.

Alternatives are all of the other options.

Here are a few that the company can consider:

• Salary cuts
• Reduced hours
• Job-sharing
• Voluntary severance or early retirement
• Temporary leave
• Training and redeployment
• Cutting non-salary expenses

 

Selection of employees for retrenchment:

If retrenchment is unavoidable, the employer should apply the agreed-upon selection criteria to decide who will be retrenched.

Here are examples of selection criteria for retrenchment:

• Last-in, first-out (LIFO)
• Skills and qualification
• Performance-based
• Attendance
• Disciplinary record
• Job function

 

Severance pay and notice:

Severance pay = at least one week’s remuneration for each completed year of service/employment.

Retrenched employees should receive a notice of retrenchment (a formal letter that details retrenchment details, such as dates and severance agreements) and collect severance pay from the employer.

The retrenchment payout that each employee is entitled to depend on their history with the company, their role, and the details of the retrenchment.

A potential retrenchment payout could include payment for the following:

• Severance pay
• Notice pay
• Leave pay
• Additional payouts
  • Pro-rata bonus
  • Pension fund
  • Other

 

Here’s an example.

 

 

Susan has been working for ACME for 5 years. She has a high-paying job and earns a monthly salary of R50,000, and has 5 days of unpaid leave.

She would receive the following severance package:

• Severance Pay: 62,500 ZAR (assumes a weekly wage of R12,500 * 5 years of employment)
• Notice Pay: 50,000 ZAR (one month’s salary in this case)
• Leave Pay: 11,365 ZAR (assumes a daily wage of R2 273 * 5 days of unpaid leave)

 

The total retrenchment payout would be R62,500 + R50,000 + R11,365 = R123 865.

This is a simplified example, but you get the idea.

 

Assistance to the retrenched employees:

To ensure that retrenched employees land on their feet, employers should provide assistance to the retrenched employees. This may include references, job counselling, training, or help seeking alternative employment.

 

Dispute resolution with the CCMA:

The CCMA (Commission for Conciliation, Mediation, and Arbitration) is a dispute-resolution body in South Africa—specifically disputes between employers and employees.

 If a dispute arises from the retrenchment process, it can be referred to the CCMA for resolution.

 

Retrenched and over-indebted?

This could be one of the worst scenarios that you’ll ever find yourself in: getting retrenched while you have a stack of unpaid debts.

Things may get tough if you’re going through retrenchment or just got retrenched.

To prepare for a period of unemployment, you could consider debt counselling (debt review). Through debt counselling, you could reduce and simplify your monthly debt repayments (make one monthly payment at a lower monthly cost).

It’s a practical solution for anyone that is struggling to keep up with their debt and has several other advantages and possible disadvantages to consider.

 

Final thoughts

Going through retrenchment can be difficult. Now, you’re equipped with the knowledge to navigate the process correctly.

If you’re an employee getting retrenched, use this post to ensure the process is fair.

If you’re an employer, use this post to guide your decision-making. Consider all of the alternatives and reassure your retrenched employees with fair severance.

If retrenchment puts your financial circumstances at risk, consider contacting our team at My Debt Hero to find out how our debt specialists can help.