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DRG Outsourcing HR Article: Retrenchment in terms of Section 189a LRA

Dismissal of employees that is based on the operational requirements of the employer is regulated by Sections 189 and 189A of the Labour Relations Act 66 of 1995 (LRA).

A Code of Good Practice has also been issued in terms of the LRA to govern the retrenchment process to be followed by an employer. Dismissals based on the employer’s operational requirements are more commonly known as retrenchments.

Two types of retrenchment processes are distinguishable: small scale retrenchments and large-scale retrenchments. Small scale retrenchments are regulated by section 189 of the LRA, while large scale retrenchments are regulated by section 189A of the LRA When a company considers retrenchment, procedure must be followed in order to comply with the Labour Relations Act in respect of the retrenchment of any member of staff.

The retrenchment process normally consists of two important stages:

  1. The decision by the employer that costs need to be reduced by means of retrenchment of staff (the economic rationale)

  2. Deciding on the best way to effect retrenchments to ensure that the process is fair.

It is important that both employers and employees understand the requirements of the Labour Relations Act and how employees’ rights are protected.

All employees (and their employers) involved in a retrenchment should at least be aware of the


When management decides to reduce costs by retrenching staff, the employer must firstly seek avenues to minimise retrenchment. This could include for example requesting employees to work short time, eliminate overtime, or impose a timeous moratorium on appointing new staff, transfers, etc. An employer cannot simply make a unilateral decision and announce that short time is going to be worked with immediate effect to avoid retrenchment. Such a decision must be as a result of a process of consultation with the effected employees in order to comply with the fairness requirement.


An employer is obliged to consult with its employees when it contemplates dismissing one or more of the employees for operational reasons. An employer may not assume that an employee will accept redeployment or transfer within the company unless the employee is contractually obliged to do so. An employer is required to provide its employees with a statutory notice in terms of section 189 (3) of the LRA which discloses in writing all relevant information relating to the proposed retrenchment prior to commencing the consultation process. An employer must consult not only on the consequences of the proposed retrenchment but in respect of the business needs and to be able to show that all reasonable alternatives have been considered prior to contemplating the need for retrenchment.

An employer must thereafter engage in meaningful consultation with its employees or their representatives to achieve consensus. Meaningful consultation requires the employer to allow the employee or its representatives an opportunity during consultation to make representations about any matter connected with the proposed retrenchment and for the employer to respond.

The Notice which is given in terms of Section 189(3)

The employer must give notice to the affected employees of the need for the proposed retrenchment. This notice must be in writing and contain the necessary information for the consulting employees to make representations at the consultation.

The necessary information includes, but is not limited to:

  • reasons for the proposed retrenchment

  • options considered by the employer to avoid the proposed retrenchment and the reasons for rejecting these options

  • number of employees likely to be affected and their positions

  • proposed selection criteria for selecting employees for retrenchment

  • time when the retrenchment is likely to take effect

  • proposed severance pay

  • any assistance that the employer proposes to offer the employees who are retrenched

  • possibility of future employment of the employees who may be retrenched

  • number of employees of the employer; and/or

  • number of employees that have been retrenched for the last 12 months.

If the information on the notice is insufficient, the consulting employees may request the employer to disclose more information. For example, the employees may request the employer’s audited financial statements, where the reason for the proposed retrenchment is for cutting costs.

Selection criteria

An employer ought in most cases to apply the selection criteria of last in first out ("LIFO") subject to skills, qualifications and experience. It is the obligation of the employer to try and place potentially affected employees in the proposed new structure – on no account should existing employees be treated as applicants for employment.

Severance pay

An employer is required to consult with potentially affected employees on what a reasonable severance package ought to be. Many employers have policies and past practices in this regard. The severance package cannot be less than one week's remuneration from each completed year of service. An employee would also be entitled to notice pay in addition. Many employers, particularly in smaller retrenchments, are prepared to make an additional ex gratia payment to an employee in full and final settlement of all claims relating to the employee’s termination of employment to obtain finality and to avoid the costs and time involved in litigation.

Tax directives

The employer must submit a tax directive application to SARS before the lump sum amount is paid to the employee. The employer will apply for a tax directive by filling in an IRP3(a) form and sending it to SARS.

Upon receipt of this form, SARS will work out the correct amount of employees’ tax that the employer must withhold on the severance benefit, and the employee will receive that benefit net of tax from the employer.

The employer will issue the employee with an IRP5 tax certificate reflecting the gross amount of the benefit and the employees’ tax that was deducted. The employee will need to declare this in his annual income tax return.

UIF claim process for retrenched individuals Retrenched individuals who have been contributing to Unemployment Insurance Fund (UIF) may claim for unemployment benefits. The amount of money that can be claimed: If one has worked for less than four years, one may claim for one day for every six days whereas if one’s contributions are more than four year’s one may can claim for a period of up to 238 days. The maximum payout does not exceed 58% of one’s daily earnings.

Code of Good Practice on Dismissal Based on Operational requirements

Whilst applying the formulations of the statutory provisions, employers should keep a watchful eye on the guidelines provided in the Code of Good Practice on Dismissal Based on Operational Requirements, as briefly outlined:

The Code recognises the right of an employer to dismiss (retrench) employees if the reason is based on economical, technological, structural or similar needs.

The code further recognise that retrenchment is categorised, as a ‘no fault’ dismissal i.e., the employee is not responsible for the termination of employment.

The Code places an onus on the employer to explore alternatives to dismissals and further that the employees affected by retrenchment are treated fairly. Both procedural and substantive obligations are placed on the employer according to the Code.

The Code highlights that the purpose of consultation is to participate in a joint consensus seeking exercise, to reach agreement if possible and for the process to commence as soon as possible.

Further guidelines are that the employer must disclose all relevant information, that the topics for consultation provided in S 189(3) should not be a closed list and that the employer should keep an open mind on any viable alternative proposals. The guidelines in the Code clarifies that the period of consultation is not prescribed but that the consultation process should at least provide for an opportunity to meet and report back to employees, to meet with the employer and request, receive and consider information.

Urgency of the retrenchments should not hinder proper consultations; however, the Code recognises that the process may become more truncated.

The Code further provides detailed guidelines on the selection of employees that may be retrenched. Fair selection criteria according to the Code include length of service, skills and qualifications. The general neutral selection test however is the ‘last in first out’ (LIFO) principle.

The Code requires that the offer of future re-employment in the event a suitable position becomes available be raised as part of the consultation process.

The Code reflects on the minimum severance pay and points out that an employee may not be entitled to severance pay if the employee refuses a reasonable alternative offer of employment.

Reasonable alternatives according to the code, is firstly the reasonableness of the offer and factors such as pay, job security and status and secondly the employee’s personal circumstances.

Training Lay-off Scheme as alternative to retrenchment

According to the Department of Labour, the Training Layoff Scheme was introduced and presented to the public in ‘response to the international economic crisis’ to the way that South Africa should respond to the economic challenges.

The scheme acknowledged the importance of training and skills development and introduced it as follows:

Training and skills development need to be prioritised, quality improved and the learnership programmes enhanced. In addition to other measures to avoid retrenchment, one further option that the parties will consider is training layoffs, financed by the National Skills Fund (NSF) and Sector Education and Training Authorities (SETAs), for workers whose employers would ordinarily retrench them and which can be introduced on terms that would keep them in employment during the economic downturn, but re-skill them as an investment for the future economic recovery.

Any agreement to participate in the scheme will be facilitated and overseen by the CCMA and ultimately approved by the Department of Labour.


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