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14 Apr 2020
BY Brian Patterson AND Audrey Johnson

South Africa: Cost-cutting employment alternatives to retrenchment following the extended lockdown

Like many other countries worldwide, South Africa went into a 21-day national lockdown on 27 March, in an effort to help slow down the spread of the Coronavirus (COVID-19). The lockdown has already had a devastating impact on the economy and on employment in a country that was already in recession.

This has already been felt by many in their pockets. The national lockdown has precluded employees (except those that can work from home or those that are involved in an essential service) from lawfully tendering their services. Concomitantly, employers cannot lawfully accept their tender and have no legal obligation to pay. The lockdown constitutes a statutorily introduced reciprocal supervening impossibility of performance of the employment contract. While government has urged employers that are in a position to continue to pay remuneration to do so, there is no legal obligation on employers to pay remuneration during the lockdown. Of course, the reality is that, given the economic climate at the time that the lockdown was imposed, employers that could continue to pay remuneration to employees that aren’t working were few and far between.

In an attempt to ameliorate the detrimental impact on employees, the Unemployment Insurance Fund (“UIF”) has set aside ZAR40-billion in a dedicated relief scheme (the COVID-19 Temporary Employer-Employee Relief Scheme). There was initial confusion as to how the scheme works, and who may claim from it,  particularly since the regulations governing it suggested that employers had to demonstrate “financial distress” to be in a position to claim on behalf of their employees. But amended regulations published in the past week have abandoned this requirement. Employers can therefore claim this benefit for any of their employees that suffer a loss of income as a result of the closure, or even partial closure, of the business as a result of COVID-19. It has been reported that so far ZAR356-million has been paid to employers that have successfully applied. However, given the publicly and officially acknowledged lacklustre capacity and administrative capability of the UIF, and the vast number of claims that will have to be processed, UIF benefits may be delayed for weeks, possibly months. This will be cold comfort to employees that live hand-to-mouth and rely on receiving payment to survive during the extended lockdown which will take us beyond the next payday.

On Thursday, 9 April, President Cyril Ramaphosa announced a two-week extension of the national lockdown, to the end of April. This announcement will undoubtedly also have many employers going back to the drawing board this week to reassess the impact of the extension on their businesses and to consider the possibly drastic measures they may have to take, both prior to and after the end of the lockdown, to save their businesses or curtail the damage.

The grim impact of the initial 21-day lockdown on our economy, has been extensively reported on. The Reserve Bank projected that it could result in a 2.6% contraction of GDP. It also projected about 370 000 jobs are likely to be lost and about 1 600 businesses may go insolvent. The extension of the lockdown is likely to result in even bleaker forecasts.

In announcing the extension, President Ramaphosa said that Cabinet was still working on a comprehensive package of economic support measures. However, public sentiment appears to be that these are unlikely to make a significant difference if one considers that the existing state programmes haven’t gone a long way to provide relief – particularly not for big business. Furthermore, privately funded relief initiatives appear to already be completely oversubscribed to.

As a result, considering and exploring creative and effective ways to contain costs when the lockdown is over must therefore now be front of mind for businesses if they are to have any chance at ensuring their sustainability and long term viability and at curtailing massive job losses as far as possible.

While restructuring and some retrenchments ultimately do appear to be inevitable for most businesses, there are a number of alternatives that employers could (and ought) to be considering before embarking on any retrenchment exercises in terms of section 189 of the Labour Relations Act (the “LRA”). So, what are the various cost containment measures that employers could be considering as possible retrenchment avoidance mechanisms?

At the outset, the starting point must be to appreciate that the majority of available measures will result in changes to employees’ terms and conditions of employment insofar as their agreed ordinary hours of work and/or remuneration is concerned. In terms of South African employment law, changes of this nature cannot be implemented unilaterally. As such, they will require the buy-in and agreement of the employees.

By now, most employees do appreciate the dire situation businesses are facing. It ought to be possible for employers to secure employee consent if the genuine need for the measures being proposed is transparently and openly communicated to them. Moreover, the proposals must clearly be posited as measures to avoid extensive retrenchment and, for some employers, even their possible insolvency. This will ensure that employees understand the need for compromise and accept that the alternative to what the employer is proposing (ie, job loss could be far worse for them).

The most obvious cost-cutting mechanism is persuading employees to agree to a reduction in salary. Many large South African employers, including government itself, have already taken steps to implement salary cuts in the last week, with the financial pain primarily being taken by the top earning, senior executives.

Rather than simply requiring employees to accept a reduction in salary, employers could also consider implementing an incentive scheme in terms of which employees agree to forego a percentage of their remuneration and for that amount to be invested in a long-term incentive scheme of some nature. For example, in listed entities, the agreed percentage of their remuneration could be invested in a phantom share scheme so that employees receive notional shares that track the value of the actual share price and can be cashed in at a future date, subject to certain conditions.

Employers can also review and analyse the use and rostering of employees that are employed on atypical contracts of employment such flexible, zero hour contracts and fixed term contracts. Employers could seek to make full use of the flexibility, and benefits of automatic termination based on expiry, that these contracts provide. However, the risks associated with taking these steps must be carefully considered.

Requiring employees to agree to short time or a temporary layoffs may work well in industries where the level of available work for employees after the lockdown is such that having all employees return to work full time cannot be justified. There are many forms that this could take including a full temporary layoff (where identified employees don’t work at all for an agreed defined period), a rotational layoff (work only every second week and accept no, or reduced levels, of remuneration in the weeks that they aren’t working), short time (for example requiring employees to only work and be paid a shorter day or perhaps a three/four day work week).

In some industries, collective agreements that have historically been concluded with organised labour, through centralised bargaining structures, do provide for short time and layoffs to be implemented without having to obtain employee consent at plant level, subject to certain requirements and restrictions. These include the metal and engineering industry, the clothing manufacturing industry, the motor industry and the electrical industry in respect of scheduled employees.

Even prior to the COVID-19 pandemic, the UIF had a Temporary Employer-Employee Relief Scheme in place in terms of which employees that have been placed on short time or temporary layoff by their employer, as a measure to avoid their retrenchment, could claim compensation from the UIF. It appears that these benefits will continue to be available to employees.

Once the employer has considered and explored the possibility of the above alternatives, and employees have either refused to agree to them, or it has become apparent that the above measures will not effectively eliminate the need to restructure, the employer may find itself in the position that it has to contemplate the possibility of retrenching employees. At that point, employers will be obliged to issue employees with the required notices in terms of section 189(3) of the LRA. The lockdown, in and of itself, does not prevent an employee issuing such notices or letters of termination of employment because employees are on unpaid absence and not leave. These notices will invite employees that are at risk of being retrenched (or their trade union) to consult with the employer on the need and reasons for their proposed retrenchment and the terms that will apply to their retrenchment if a decision is ultimately made to proceed with a restructuring and declare positions redundant.

Insofar as employees didn’t agree to the cost containment proposals suggested by the employer before it contemplated their possible retrenchment and started the section 189 process, these could again be considered and explored as an alternative to forced retrenchment during the section 189 consultation process.

Of course, the difficulty is that a retrenchment exercise, particularly a large scale one, could result in significant retrenchment costs being incurred (consisting of severance pay of at least one week’s remuneration for each completed year of service, accrued leave pay and notice pay) and is deleterious to the industrial relations environment. Many employers may find themselves in the position that they do not currently have the cash flow to fund these costs. This results in the need to identify and implement alternatives, in the form of effective and viable cost containment mechanisms, being more pressing than ever.

There are unfortunately no easy answers for employers in these challenging and uncertain times and any plan must be carefully analysed, considered and backed by sound legal advice, before it is implemented.  

Brian Patterson
Executive | Employment
+27 82 338 9835

Audrey Johnson
Executive | Employment
+27 82 708 0385

COVID-19, also known as the Coronavirus, is an infectious disease caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) that was declared a pandemic by the World Health Organization on 11 March 2020. The disease has since been reported in over 190 countries.

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