What you need to know about retrenchment

What is retrenchment?

Retrenchment is a type of dismissal of an employee in which the employee is dismissed as a result of an employer’s “operational requirements”.


An employer’s operational requirements are basically reasons for an employer not being able to conduct business at its usual capacity, and could therefore be economic or organizational in nature. For example, a company cannot afford to maintain the salary of the employee anymore due to a significant drop in sales or turnover.


Does this mean that all dismissals or retrenchments as a result of operational requirements are fair?

Not necessarily.


In order for a dismissal to be fair, it has to be both substantively and procedurally fair. In simple terms, this means that there has to be a valid and fair reason for the dismissal, and that the procedure followed in executing the dismissal has to be fair as well.


It has to be noted that the procedure will vary depending on whether the employees being dismissed comprises a small-scale or large-scale respectively. For the sake of this discussion we will focus on small-scale retrenchments.

We mentioned earlier that a retrenchment is a dismissal based on an operational requirement. As a result, this basis of dismissal would be substantively fair as the reasoning is valid and fair.


However, for a dismissal (retrenchment) to be procedurally fair the process of dismissal has to comply with certain provisions of the Labour Relations Act (LRA). For example, in order for the retrenchment to be procedurally fair, there has to be a written notice inviting the employees or their registered trade unions to consult with the employer; there also has to be the actual consultation between the parties; there has to be the sharing of information; and there has to be the actual notice of retrenchment.


The issuing of the written notice is pretty much self-explanatory, however it will include (but not limited to) the employer’s reasons for the proposed dismissal as well as the number of employees to be dismissed.


With regard to the actual consultation, the employer and employees with whom are being consulted, must seek to reach a consensus on the matters contained in the notice.


The employees should be allowed the opportunity to make representations about the matters contained in the notice, and with that, the employer is entitled to respond thereto.


With regard to the notice of retrenchment the employer will select the employees to be dismissed based on a selection criteria agreed upon during the consultation, or a selection criteria that is fair and objective such as “last in, first out” (“LIFO”). Only once this process has been exhausted will the employer issue notices of retrenchment.


Okay and what happens to a retrenched employee after this procedure?

A retrenched employee will be paid out as follows on the last day of the month of his/her retrenchment:


Severance pay – a retrenched employee must at least be paid 1 week’s pay for each completed year of ongoing service. However, if his/her employment contract specifies a severance payment amount, and if that amount is larger, the employee will be entitled to receive that amount.


In some instances an employer may offer alternative employment with the employer or other employer. If the employee refuses this alternative employment, he will not be entitled to severance pay.


Leave – a retrenched employee will be entitled to an amount of money equal to the annual leave that has not yet been taken by the employee.


A retrenched employee must be paid “notice pay” instead of working the employee’s notice period. In other words:

  • if the employee was employed for less than 6 months, s/he must be paid 1 weeks’ notice pay;
  • if the employee was employed for more than 6 months but less than 1 year, s/he must be paid 2 weeks’ notice pay;
  • if the employee was employed for more than 1 year, s/he must be paid 4 weeks’ notice pay.

In certain instances where applicable, the retrenched employee will be entitled to any pro-rata payment of a bonus, pension etc.


If I’ve been unfairly retrenched, what happens then?

An employee who feels that they’ve been unfairly retrenched may refer their dispute to the Commission for Conciliation, Mediation and Arbitration (“CCMA”) or a bargaining council.


This must be done within 30 days from date of retrenchment or receipt of the notice of retrenchment. If the dispute is not resolved at conciliation, the employee may refer the dispute to the Labour Court, and in certain instances back to the CCMA for arbitration.


It may be directed by the CCMA or Labour Court that the employer:

  • Re-instate or re-employs the employee (with or without back pay). However, this remedy will only be available if it is found that the retrenchment was not procedurally unfair (as opposed to substantively unfair);
  • Pay compensation to the employee.


Note that once an employee is retrenched, he/she is entitled to claim unemployment benefits (“UIF”).


Book a consultation with us if you need to discuss your specific case in more detail, or if you have any queries on this particular topic.




DISCLAIMER: This article should not be taken as thorough legal advice, and merely serves as a guideline. Each case has its own specific circumstances, and the law is ever-changing, therefore legal advice should be sought by a legal professional thereon. For a consultation on the merits of your case by an experienced admitted attorney, refer to one of our consultation products here.