Dealing with Retrenchment in South Africa

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Retrenchments have become a common occurrence in South Africa as companies struggle to stay profitable.

For many people, job security can be one of the most important factors contributing to a lifestyle that is happy and relatively free from financial worry or economic stress. Knowing that you can rely on a constant stream of income each month puts you in a position to plan for your future while also managing your life in the present, and is of great importance for people from many different backgrounds. Knowing what to expect in a situation in which your job security is threatened can make such a situation far simpler to deal with, and can go a long way towards alleviating the stress and uncertainty involved.

Reasons for retrenchment

An unfortunate effect of the current economic climate is that many businesses and employers of different kinds are restricted in their growth, and often need to cut down on their expenses in various different ways. Due to the fact that most companies in a variety of sectors rely on a workforce to carry out their business operations, a constant drain on the gross income that such companies make comes in the form of salaries that must be paid to employees. It follows that cutting down on the size of the workforce can alleviate this financial burden for companies that are struggling to turn a decent profit due to economic circumstances.

Many companies routinely restructure their workforces in accordance with current economic trends, and retrenchment is a common part of this restructuring process. Simply put, retrenchment is what takes place when an employee is dismissed from their current place of employment for reasons relating to the employer’s changing operational requirements. This is often referred to as a ‘no-fault dismissal’ to emphasise the fact that the reason for the dismissal does not pertain to a fault in the employee’s conduct or performance, but has come about as a last resort for the company in question. In fact, an important requirement of current labour law states that a company may only legally retrench its employees if it can prove that no reasonable alternatives are available.


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Legal requirements and procedures

While the Labour Relations Act 66 of 1995 sets out various requirements that the retrenchment procedure must fulfill in order to be considered legal, due to the power imbalance inherent in many employer-employee relationships, it sometimes happens that employers implement retrenchment schemes in a way that is unlawful, whether intentionally or due to ignorance of the law. For employees, knowing the requirements as they are set by the aforementioned Act can help them to protect themselves against unlawful retrenchment in a variety of situations. Employees can take legal action if they believe they have been unfairly dismissed in terms of the Act.

As required by the Act, the first official step in initiating a retrenchment procedure is for the employer to issue a written notice to all the employees that are being considered for retrenchment.

The notice must contain the following information:

  • The circumstances leading up to and reasons for the proposed retrenchment
  • A comprehensive account of the alternatives that were considered by the employer as means of meeting changing operational needs, and the reasons that these alternatives were rejected
  • The size of the workforce (number of employees) that is likely to be affected by the proposed retrenchment
  • The method that will be or has been used to select the employees who will be retrenched
  • The provisional time at which the proposed retrenchment will come into effect
  • The severance pay proposed by the employer as compensation for retrenchment
  • Any additional assistance (over and above severance pay) that the employer may offer the employees who are facing retrenchment
  • The possibility for future employment of retrenched employees by the same employer
  • The number of employees that have been retrenched by the same employer in the year leading up to the current retrenchment
  • The relevant details (including date, time and place) of consultations that will take place to allow employees to address their concerns regarding the proposed retrenchment

Once the above notice has been issued, employers are legally obliged to hold consultations with affected employees and/or their trade union representatives, and may not follow through with the proposed retrenchment until this consultation process has been completed. This requirement afford employees the opportunity to clarify their position as well as to suggest alternatives to retrenchment that may not have been considered by the employer.

The consultation process should take place only after a reasonable period of time has been allowed for employees to consider the notice of retrenchment and formulate alternative proposals. Employers are obligated to consider these proposals carefully and to provide feedback as to their acceptance or reasons for rejection. Failure to complete this process properly can lead to the retrenchment being contested as unlawful.


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Severance pay

As prescribed by the Act, severance pay must be paid to employees who are being retrenched, at a minimum rate of one week’s pay for every year of service. This does not apply in the case where a retrenched employee refuses reasonable alternative employment offered by the same employer (such as a position in another branch of the company). Another consideration to take into account arises in the case of large-scale retrenchments involving more than fifty employees, in which case further requirements apply.

Retrenchment cover

Despite the protection afforded by the Act, being retrenched can be highly problematic for employees who are affected, particularly in an unstable economy where job security is of the utmost importance. Fortunately, further protection is available in the form of retrenchment cover.

This type of insurance policy is designed to provide financial support in the event of unforeseen retrenchment, and can go a long way towards alleviating the negative effects of losing one’s job, particularly if the severance pay does not go a long way. Individual policies differ, with some paying out a percentage of the employee’s former salary for a prescribed period, a lump sum payment, or a combination of the two. Retrenchment cover can be taken out with most insurance companies, or may even be included as part of the original employment package.


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