How to retrench staff

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How to retrench staff

You may be forced to let employees go as the economy slows.
Your Business Magazine looks at the steps small business owners must follow when retrenching…

According to HR and employment specialist Claire Stewart, the reasons for retrenchment must be genuine and the process fair and correct to meet the demands of our legal system. Substantive criteria must be economically, technologically and structurally justifiable and the process should involve extensive consultation between employer and retrenchees.


“Consultation with employees must start very soon after the decision is made to retrench,” says Stewart. This will allow both parties to engage in discussions to minimise retrenchments, establish and sometimes push back timeframes, as well as reduce the negative impacts of retrenchment. For example, employees might have ideas about other ways to substantially cut costs, generate more profits or improve cash flow.

Start the consultation by scheduling a meeting to discuss a written memo containing all the relevant information. Carefully plan what you are going to say during the meeting and stipulate all the details when preparing the written notice. This document must state why retrenchment is necessary, what will be happening, when it will happen and who will be affected. This gives the employer and employees a chance to look for alternatives such as salary cuts or reduced working hours. You can reduce the financial pressure on the company by lowering salaries, but both parties will have to find this solution acceptable.

Who to choose?

According to our labour law, both parties – employer and employee – determine who is to be retrenched and the process can’t be used to get rid of underperformers. Employers are also not allowed to discriminate. So if you decide to retrench all your part-time workers and 90% of them are women, you are indirectly discriminating.

The LIFO principle (Last In, First Out) is seen as a fair way of selecting who will be retrenched. In SA you can take affirmative action into account, as well as functions fundamental to the business. Affirmative action targets can, however, only be taken into account, if you have a detailed Employment Equity Plan. Stewart warns that you must be careful when choosing retrenchees and that any exceptions, such as keeping a recently-appointed employee in what is a key position, must be communicated, or you could end up at the CCMA (Commission for Conciliation, Mediation and Arbitration).

Steps for retrenchees

Employees aren’t required by law to respond to the written notice, but it is in their best interest to do so and to come up with solutions. The key to retrenching correctly is to start the process early enough to give employees time to deal with the shock, consult with their employer about relevant issues and look for new positions.

“In my experience problems arise when the timeframe is too tight,” says Stewart. She suggests that SMEs allow for a minimum notice period of one month, but ideally three months, during which all consultation can be finalised. “I do understand, however, that this is a luxury most SMEs can’t afford as the decision to retrench is normally borne out of absolute necessity and only executed when the situation becomes desperate.” But small business owners will normally only retrench one or two staff members at a time, which means the consultation period will be relatively short especially when compared to a large and diverse group.

Assisting those affected

While letting employees go is always hard, it is especially tough on small business owners as staff members normally work very closely together. Time off to go to interviews and talk to possible employers will be useful for retrenchees. Corporates often offer retrenchees some form of professional counselling, but the expense of this is prohibitive for SMEs. Employers can, however, help retrenchees update their CVs, provide good references, detail that the termination was for operational reasons only and identify possible alternative employment opportunities for them.

Calculating severance packages

Severance packages are normally worked out as a minimum of one week’s pay for every year worked at a company. Corporates normally pay two to three full month’s salary, but SMEs can usually only afford the minimum. “The SME’s decision to retrench is often left until it is absolutely necessary, which frequently means that there is not much money available for the retrenchment package,” explains Stewart. “Some SMEs do, however, manage to pay one or two month’s salary, depending on how long employees worked for them and what the reasons for retrenchments are.” If the employer offers the retrenchee an alternative position, which is similar to his existing job, and the employee turns this down, the employer doesn’t have to pay a severance package. However, if the employee has a good reason for not taking the new job, the severance package has to be paid. The employee may, for instance, turn down the position because he does not have the necessary skills to effectively carry out the job.

Managing company culture

“Your company could become an unhappy and unsettled place during the retrenchment process,” warns Stewart. Company culture has to, therefore, be managed very carefully. The first step is to be clear and open about the retrenchments. Brief managers and make sure that internal communications, including memos and emails, reflect on and explain the situation. The last thing you want is for your staff to become negative and for key staff members to resign. Stewart suggests meeting with all staff members before things go sour. Talk to them about the importance of keeping a positive culture at work and ensure them that your door is open if they are worried about the company’s financial position or the effects of the retrenchments. “If the retrenchment process is not communicated and managed properly there could be a lot of gossiping and speculation, which is counterproductive and disruptive in the workplace,” Stewart explains. If unsettled staff members stir discord amongst the remaining staff, take swift disciplinary action. This could be in the form of counselling or even a written warning.

Getting it wrong

The consequence of unfair retrenchment is a hearing at the CCMA or Labour Court, possibly leading to you being required to reinstate retrenched employees. Stewart warns that this can happen even if you have followed the retrenchment process correctly. “The reality is that desperate people feel that they have nothing to lose by going to the CCMA and hope to be reinstated or paid a monetary award.” If you are unsure about retrenchment procedures approach an HR consultant, labour lawyer or visit: “Business owners can, of course, manage the process themselves,” says Stewart. “And as long as you have followed the rules, don’t be too scared of the CCMA. The process often involves arbitration, which may be just what is needed to work through any problems that may have arisen.” Letting employees go is one of the toughest challenges small business owners will ever face, particularly if they have come to know their staff well and have worked closely with the team. While the psychological effects of retrenchment are profound for both employers and employees, it is important to stress that the process is in no way personal. It is purely a business decision.

Claire Stewart is the founder of PeopleWise, an HR and employment consulting firm. She can be contacted on 031 266 8194, 082 857 9396 or
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