The global economic climate continues to exert a chilling toll on employers, with South African businesses not escaping the frosty effects of slowing demand and creeping inflation. Like their counterparts in many countries, South African employers are actively seeking mechanisms to manage costs, consolidate employee headcount, and align their businesses with changes in customer demand and behaviour. Companies are closing offices or branches, enforcing hiring freezes and effecting staff reductions, whilst also exploring various staffing solutions for their operations.
Whilst the lockdown regulations may seem like a distant memory, the changes in work practices necessitated by lockdown have had a lasting effect on almost all workplaces. Some companies continue to embrace changes implemented during lockdown, such as remote working, whilst others are pushing back, deeming these changes to be no longer necessary or useful. Such employers are demanding a return to the office and looking to consolidate the business by connecting people in person again.
What is clear is that businesses have been exposed to changes to their work practices, with many concluding that there is merit in reconsidering long-held beliefs regarding employment strategies and organisational structures. Globalisation is certainly not a new concept, but businesses appear more willing to explore the feasibility of offshoring work that could be jurisdiction-agnostic. Improvements in technology have also greatly contributed to the receptiveness of leaders to working remotely with teams of employees scattered across the globe. In some sectors, South African operations have been the recipients of remote work that was previously conducted in other jurisdictions, with businesses taking advantage of the relatively lower wage costs and talent pools still present in some industries or fields. In other areas, local operations are the net losers in terms of headcount because jobs are exported to even lower-cost jurisdictions or consolidated into other regions. This trend is likely to continue.
The legal process
The legal process of retrenchment in South Africa aims to facilitate discussion between in-scope staff and the employer. The process lends itself to engagement and reaching consensus on the terms of the staff exit, with the employer ultimately entitled to effect the redundancies where no agreement is reached. Unilateral terminations may be adjudicated by the employment tribunal or specialist labour court, with the employer required to prove the substantive and procedural fairness of the redundancy. Paying further financial consideration to in-scope staff could unlock the benefit of settling all claims at the time of termination, avoiding the cost and risk inherent in litigation.
Costs and compensation
The unprecedented high rate of unemployment in South Africa (32.7%), however, impacts the willingness of many employees to agree on settlement terms as new opportunities are not in abundance. This has resulted in more combative retrenchment consultations, with more employees lawyering up during redundancy processes. This impacts the employer's own legal costs, the duration of the process and opportunity to minimise the negative impact of reorganisation. Unrealistic employee expectations as to what they are likely to receive in compensation should they succeed at the tribunal or court also add to the risk of failing to agree on exit terms and add to the incredibly high rate of termination disputes processed by South Africa's labour dispute resolution framework. Employers analysing the cost versus benefit of reasonable enhanced severance often conclude that additional consideration is worth the price in order to finalise the process. Similarly, many employees also conclude that they are better off with an additional upfront payment rather than placing their faith in convincing an arbitrator or judge that their termination was not warranted and that they are entitled to greater compensation than the employer offered as part of an agreed exit.
During times of uncertainty, apprehensive employers could default to erring on the side of caution to avoid legal risk. However, careful consideration of legal and other risks could allow for better decision-making when unpacking the options to manage these risks versus the direct impact of failing to take appropriate steps, unduly delaying difficult exit decisions or the adverse impact on the business caused by disruptive employees.
Redundancies can be effected with limited risk and impact, provided the broader approach resonates with staff and they feel that local aspects have been considered. Notably in South Africa, issues such as the impact of redundancies on workplace transformation remain germane in our market and will continue to do so in light of the slow pace of improving ethnicity and gender representation in most workforces in the country.
Further aspects to consider when contemplating reductions in force include the risk of doubling the compensation exposure where inadmissible reasons impact the redundancy decisions (including selecting staff for redundancy). Other pitfalls include extending enhanced severance to all-comers, not being selective about which in-scope employees to target and being left with employees ill-suited for the new roles while marketable employees are paid to leave service.
Selecting staff to be made redundant or retained is arguably the most critical business consideration during any reduction in force. Employers often miss the opportunity to retain the most appropriate employees post redundancy by using past performance (or suitability for old roles) as determinative factors for selecting those to be appointed in new roles. Ideally, employees should be measured against the requirements of the new roles to determine their suitability for future employment. Competency, skills, psychometrics and similar tests can be used to predict their suitability for new roles, rather than relying on past performance in redundant roles to select those to remain in service in new roles. The courts are aware of the fact that selecting employees for new roles is a forward-looking exercise, with rearward-looking criteria (like past performance and competence in redundant roles) not being the most reliable indicators of suitability for fresh or amended roles in the new structure.
With South Africa's stratospheric unemployment rate showing no signs of significant improvement, the need to keep people in active employment is important, not only for employees but also for employers. Employers can avoid their obligation to pay redundant employees severance pay by securing reasonable alternative employment for in-scope staff. This employment may even be with a different employer or legal entity. This legislative latitude afforded to employers aims to reward them for securing ongoing employment for redundant staff and thus reducing the burden on the state fiscus by adding to the pool of unemployed workers drawing unemployment benefits. Employers should consider roles with other group entities, suppliers or service providers when contemplating staff redundancies. If the employer secures alternative employment for the employee, and such employment is a reasonable alternative to the employee's redundant role, the employer is released from the duty to pay statutory severance pay.
South Africa is not one of the most demanding or complicated jurisdictions in which to effect redundancies, despite some views to the contrary. This is certainly true when considering more onerous employer duties in jurisdictions such as Italy, France, and the Netherlands, to name some pertinent countries with even greater employee protection frameworks. A detailed evaluation of the business requirement to reduce headcount, proper consideration of the future structure and how to populate it, and a humane and sensible approach to agreed exits (with the option of frank engagement with in-scope staff absent any agreement reached) will see global, multinational and local companies manage this process with the lowest possible impact on the business and remaining employees, reducing the reputational risk inherent in avoidable acrimonious terminations.
Written by Johan Botes, Partner, Head of Employment & Compensation, Baker McKenzie Johannesburg