The new Labour Act: Retrenchment and Severance

I am on record for saying “that in future, once the Labour Act, 2007 comes into operation retrenchments will be almost impossible”.

It is also true that a couple of years ago I said that “the majority of retrenchments were necessary due to a lack of innovative or lack of performance management”. Whether anyone agrees with me or not, the fact is that unless the business is completely bankrupt, retrenchments will become more difficult to execute as a result of the provisions of the 2007 Labour Act.Any business decision to retrench people would be unfair.However a business decision due to technology or economic reasons that results in a change in the staff structure leaving some or other some position redundant will result in retrenchments, and to be fair the procedures in the Labour Act must be followed.The process in the new Act differs significantly from the current position in that it will become a requirement that the business (employer) discloses to the trade union all relevant information to enable it to engage effectively in the negotiations about intended retrenchments.Merely to negotiate about the packages and conditions of dismissals is not sufficient anymore.The Act is not helpful in any way to explain or define what is meant by “relevant information” or “effectively engagements”.It is my prediction that rather sooner than later it will become a topic of a dispute in the future Labour Court division of the High Court.The trade union and employees will have the right to negotiate alternatives to the dismissals, the selecting criteria and how to minimise the retrenchments.In future the business decision will have to be negotiated and the business or directors will have no choice but to disclose information on which the decision was or will be based in future.It will become necessary that the notice of retrenchments will be a mere notice indicating that a business decision might be taken and it might have retrenchments as a consequence.Thus from early on the trade unions will be involved in any decisions and the alternatives to such decisions long before the actual retrenchment, if any, will take place.This negotiations process includes who will go and who will stay.Taking in mind the topics which will have to be negotiated and the exchange of information, the four-week period will be insufficient.It is justified to argue that retrenchments is a no-go zone unless absolute unavoidable.Severance allowances must be paid to retrenched staff and such payment does not affect the employee’s right to negotiate for more or to receive any other payment which is due to the employee.Severance allowance is the equal value of one week’s remuneration for every completed year of employment.It is calculated by taking the total monthly value of the salary package (remuneration) of the employees, excluding pension benefits, and divide it by 4.333.Severance allowance in terms of the new Act must be paid to employees if they resign at retirement age, or if the employee becomes incapable of doing the work due to illness or injury, or was unfairly dismissed.If the employees has died, then it must be paid to the family of the employee.Here nothing much is new.However, the set-off principle between severance allowance and pension fund benefits in terms of the 1992 Act has been left out.This change, I assume was done based on the practice that several employers in the past did pay, in any event, severance allowance even if it was not necessary.Severance will become a definite payment, which will require that the businesses must provide for it in its account of its books according to the General Accepted Accounting Practices [GAAP].I am also of the opinion that it will be a pretax provision, which means the fund set aside for the risk will be deducted before the tax calculation.This will reduce the amount of income tax paid by the businesses.I wonder whether the legal drafters considered that all the government employees with long years of service and fixed eyes on a very healthy GIPF benefit payment waiting for them at retirement, will enjoy the benefit of not only receiving their pension fund benefits on retirement but also payment of one week’s remuneration.I wonder what is the chunk it is going to take out of the annual budget over the next few years – perhaps those that wrote the new provision regulating severance allowance have the calculation at hand for analysis?Whether anyone agrees with me or not, the fact is that unless the business is completely bankrupt, retrenchments will become more difficult to execute as a result of the provisions of the 2007 Labour Act.Any business decision to retrench people would be unfair.However a business decision due to technology or economic reasons that results in a change in the staff structure leaving some or other some position redundant will result in retrenchments, and to be fair the procedures in the Labour Act must be followed.The process in the new Act differs significantly from the current position in that it will become a requirement that the business (employer) discloses to the trade union all relevant information to enable it to engage effectively in the negotiations about intended retrenchments.Merely to negotiate about the packages and conditions of dismissals is not sufficient anymore.The Act is not helpful in any way to explain or define what is meant by “relevant information” or “effectively engagements”.It is my prediction that rather sooner than later it will become a topic of a dispute in the future Labour Court division of the High Court.The trade union and employees will have the right to negotiate alternatives to the dismissals, the selecting criteria and how to minimise the retrenchments.In future the business decision will have to be negotiated and the business or directors will have no choice but to disclose information on which the decision was or will be based in future.It will become necessary that the notice of retrenchments will be a mere notice indicating that a business decision might be taken and it might have retrenchments as a consequence.Thus from early on the trade unions will be involved in any decisions and the alternatives to such decisions long before the actual retrenchment, if any, will take place.This negotiations process includes who will go and who will stay.Taking in mind the topics which will have to be negotiated and the exchange of information, the four-week period will be insufficient.It is justified to argue that retrenchments is a no-go zone unless absolute unavoidable.Severance allowances must be paid to retrenched staff and such payment does not affect the employee’s right to negotiate for more or to receive any other payment which is due to the employee.Severance allowance is the equal value of one week’s remuneration for every completed year of employment.It is calculated by taking the total monthly value of the salary package (remuneration) of the employees, excluding pension benefits, and divide it by 4.333.Severance allowance in terms of the new Act must be paid to employees if they resign at retirement age, or if the employee becomes incapable of doing the work due to illness or injury, or was unfairly dismissed.If the employees has died, then it must be paid to the family of the employee.Here nothing much is new.However, the set-off principle between severance allowance and pension fund benefits in terms of the 1992 Act has been left out.This change, I assume was done based on the practice that several employers in the past did pay, in any event, severance allowance even if it was not necessary.Severance will become a definite payment, which will require that the businesses must provide for it in its account of its books according to the General Accepted Accounting Practices [GAAP].I am also of the opinion that it will be a pretax provision, which means the fund set aside for the risk will be deducted before the tax calculation.This will reduce the amount of income tax paid by the businesses.I wonder whether the legal drafters considered that all the government employees with long years of service and fixed eyes on a very healthy GIPF benefit payment waiting for them at retirement, will enjoy the benefit of not only receiving their pension fund benefits on retirement but also payment of one week’s remuneration.I wonder what is the chunk it is going to take out of the annual budget over the next few years – perhaps those that wrote the new provision regulating severance allowance have the calculation at hand for analysis?