Retrenchment is never easy – for employers facing difficult business decisions or employees fearing for their livelihoods and financial security. Unlike dismissals for misconduct or poor performance, retrenchment is a no-fault termination based on the employer’s operational requirements such as economic pressures, restructuring, or technological changes.
Sections 189 and 189A of the Labour Relations Act set out specific procedures that employers must follow to ensure retrenchments are both substantively and procedurally fair, including meaningful consultation, exploring alternatives to dismissal, applying fair selection criteria like LIFO (last-in, first-out), and paying statutory severance of at least one week’s remuneration per completed year of service.
Poor handling of retrenchments can result in costly CCMA or Labour Court disputes, reinstatement orders, or compensation claims that far exceed the savings the employer hoped to achieve – making it essential for both parties to understand the legal framework, their rights, and obligations.
This guide walks you through the key steps, employee rights, employer duties, and what to expect if retrenchment becomes necessary in your workplace.
This article provides general information only and should not be considered legal advice.
Key takeaways
- Retrenchment is a form of dismissal based on operational requirements (economic, technological, or structural needs), not on the employee’s conduct or capacity.
- Employers must follow a fair process under Section 189 (small-scale) or Section 189A (large-scale) that includes written notice, meaningful consultation on alternatives, and applying fair selection criteria.
- Employees have the right to be consulted, propose alternatives, receive statutory severance of at least one week’s pay per completed year of service, and refer disputes to the CCMA within 30 days.
- Poor handling of retrenchments – such as using a checklist approach without genuine consultation or selectively targeting “problem” employees – can result in findings of procedural and substantive unfairness.
- Large-scale retrenchments (Section 189A) have minimum 60-day consultation periods, optional CCMA facilitation, and different dispute resolution procedures including the right to strike.
What is retrenchment
Retrenchment is a no-fault dismissal based on an employer’s operational requirements, as defined in Section 213 of the Labour Relations Act. Operational requirements mean requirements based on the economic, technological, structural, or similar needs of an employer.
Common triggers include financial difficulties or losses that make certain positions unsustainable, restructuring or organisational changes that eliminate roles, technological changes that automate tasks or reduce staffing needs, mergers, acquisitions, or closures of divisions or branches, and downsizing to reduce overheads or improve efficiency.
Crucially, the burden of proof rests on the employer. You cannot simply claim the company is making losses and therefore must retrench – you must produce evidence of the financial crisis, restructuring plan, or operational need. Vague assertions without supporting documentation will not satisfy substantive fairness requirements.
Retrenchments must be approached with transparency, proper consultation, compliance with legal requirements, and respect for the dignity of affected employees. Failure to do so results in findings of unfair dismissal, with remedies including reinstatement (which may be impractical or expensive) or compensation (up to 12 months’ salary).
Legal framework
Section 189 for small-scale retrenchments
Section 189 of the LRA applies to most retrenchments where the numbers don’t trigger the Section 189A thresholds. It requires employers to consult with affected employees or their representatives (trade unions, workplace forums, or employee-elected representatives) before any final decisions are made.
Consultation must be a joint consensus-seeking process aimed at reaching agreement on ways to avoid dismissals, minimise the number of dismissals, change timing of dismissals, and mitigate the adverse effects of dismissals. This is not a tick-box exercise – courts and the CCMA expect genuine engagement, not predetermined outcomes presented as consultations.
Section 189A for large-scale retrenchments
Section 189A applies to employers employing more than 50 employees if the employer contemplates dismissing at least 10 employees (if employing up to 200), at least 20 employees (if employing 200–300), at least 30 employees (if employing 300–400), at least 40 employees (if employing 400–500), or at least 50 employees (if employing more than 500).
The numbers include employees retrenched in the 12 months prior to issuing the Section 189(3) notice. If you retrenched 5 people six months ago and now plan to retrench another 6, you’ve crossed the threshold if you employ up to 200 people.
Section 189A imposes stricter timeframes: a minimum 60-day consultation period from the date of the Section 189(3) notice, during which employers may not issue termination notices or take final decisions to dismiss. Either party may request CCMA facilitation, where a commissioner assists the consultation process by convening at least four facilitation meetings. After 60 days, if no agreement is reached, employees may strike or refer the matter to the Labour Court for adjudication on substantive fairness.
Step-by-step retrenchment process
Issue Section 189(3) notice
The employer must issue written notice to affected employees and relevant representatives (trade unions, workplace forums, or elected employee representatives) inviting them to consult.
The notice must disclose all relevant information including the reasons for the contemplated retrenchments, alternatives the employer considered before proposing dismissals and reasons for rejecting each, the number of employees likely to be affected and their job categories, the proposed method for selecting employees to dismiss, the timing or period during which dismissals are likely to take effect, the severance pay proposed, any assistance the employer proposes to offer, the possibility of future re-employment, and the number of employees dismissed for operational requirements in the preceding 12 months.
Incomplete or vague notices create procedural unfairness. If you later change the reasons for retrenchment, you must amend the notice and allow further consultation on the new reasons.
Conduct meaningful consultation
Consultation meetings must be held in good faith with genuine openness to alternatives and proposals from employees.
During consultations, both parties should discuss and explore ways to avoid dismissals (such as voluntary retrenchments, natural attrition, or reduced working hours), minimise the number of dismissals if some are unavoidable, agree on fair and objective selection criteria, agree on severance amounts (which can exceed the statutory minimum by agreement), discuss timing of dismissals to reduce hardship, and consider assistance such as outplacement services, time off for job searches, or training.
Courts have emphasised that employers cannot employ a “checklist approach” – going through the motions without genuine engagement. If employees propose alternatives, you must consider them seriously and provide reasoned explanations for why they are or are not viable. Simply dismissing proposals without justification creates procedural unfairness.
Apply fair and objective selection criteria
Section 189(7) requires employers to apply selection criteria that are fair and objective, absent an agreement with the consulting parties. The most commonly accepted criterion is LIFO (last-in, first-out), which selects employees based on length of service. LIFO is generally considered fair because it’s objective, transparent, and rewards loyalty.
However, LIFO may be modified to retain employees with scarce or critical skills. This is known as “LIFO with skills retention.” For example, if pure LIFO would result in losing all your IT specialists, you can retain those employees despite shorter service, provided the skills retention decision is justified and applied consistently.
Other acceptable criteria include qualifications, experience, or performance – but performance-based selection must be supported by documented, fair performance appraisals conducted before the retrenchment process began. You cannot suddenly introduce performance criteria to justify targeting specific individuals.
Avoid arbitrary or discriminatory selection such as selectively targeting “problem” employees, employees on maternity leave, union representatives, or older workers. These create substantive unfairness and may constitute automatically unfair dismissals under Section 187.
Explore alternatives genuinely
The Labour Court has emphasised that dismissal must be a measure of last resort. Employers have an obligation to genuinely consider alternatives short of dismissal.
Common alternatives include reducing working hours or implementing short-time, eliminating overtime, freezing recruitment or filling vacancies internally through redeployment, offering voluntary severance packages, negotiating temporary salary or benefit reductions by agreement, and implementing bumping (where an employee in a redundant senior position replaces a more junior employee in a similar role).
You must record why each alternative was or was not viable. Simply listing alternatives without demonstrating genuine consideration will not satisfy procedural fairness. If employees propose alternatives during consultation, you must engage with those proposals and explain why they cannot be implemented.
Pay statutory severance and final amounts
Section 41 of the Basic Conditions of Employment Act requires employers to pay retrenched employees severance equal to at least one week’s remuneration for each completed year of service. Collective agreements or employment contracts may provide for more generous severance, and the higher amount applies.
Additional payments due on termination include notice pay (worked or in lieu) per Section 37 of the BCEA or the employment contract, whichever is longer, accrued annual leave not taken, calculated up to the last day of employment, and any contractual amounts such as pro-rata bonuses, commission, or allowances.
Provide retrenched employees with a certificate of service confirming employment dates, position held, and reason for termination, plus UIF form UI-19 so employees can claim unemployment benefits.
Issue formal termination notices
After consultations are concluded and alternatives exhausted, issue written termination notices to affected employees stating the reasons for dismissal, how selection criteria were applied to them individually, their last working day, all amounts due (severance, notice, leave), and their right to refer a dispute to the CCMA within 30 days (or to strike/refer to Labour Court in Section 189A cases).
Employee rights and employer obligations
Employees have the right to be consulted before any final decisions are made, to receive full disclosure of information about the reasons for retrenchment and alternatives considered, to propose alternatives and have them genuinely considered, to fair and objective selection criteria applied consistently, to representation by a trade union representative or elected employee representative during consultations, and to statutory severance of at least one week’s pay per completed year plus all final payments.
If you believe the retrenchment was procedurally or substantively unfair, you may refer a dispute to the CCMA within 30 days for ordinary Section 189 retrenchments, or to the Labour Court for Section 189A large-scale retrenchments. Remedies include reinstatement (rare in retrenchment cases), re-employment in a suitable alternative position, or compensation of up to 12 months’ remuneration.
Employers must comply with all procedural steps in Section 189 or 189A, provide full, accurate disclosure of relevant information including financial evidence of operational need, act in good faith during consultations with openness to alternatives, keep detailed written records of meetings, proposals, decisions, and reasons, apply selection criteria fairly and consistently without discrimination, and pay all statutory amounts on time.
Who should avoid this and safety notes
For employers
Avoid using retrenchment as a cover for getting rid of “problem” employees. If someone’s performance or conduct is unsatisfactory, use the proper disciplinary or incapacity procedures. Selectively targeting individuals during retrenchment creates substantive unfairness and often discrimination claims.
Do not rush the consultation process or treat it as a formality. Courts will examine the quality of engagement, not just whether meetings were held. Predetermined outcomes presented as consultations create procedural unfairness regardless of the operational need’s validity.
Never retrench someone on maternity leave, someone who recently lodged a grievance, or a union representative without extremely careful consideration and legal advice. These situations carry high risks of automatically unfair dismissal findings.
For employees
Participate actively in consultations. Propose alternatives, request information, ask questions, and keep records of everything discussed. Silence during consultations weakens your position if you later challenge the retrenchment.
Do not assume the process is fair just because your employer says so. Check whether the proper notice was given, whether selection criteria are genuinely fair and objective, whether alternatives were really considered, and whether you’re receiving the correct severance and other payments.
If you believe the retrenchment is unfair, act quickly. The 30-day CCMA referral deadline is strict, and late referrals require condonation with compelling reasons for the delay.
FAQ: Navigating retrenchments in South Africa
What is the difference between dismissal and retrenchment?
Dismissal is usually due to the employee’s misconduct or incapacity (poor performance or ill health). Retrenchment is a no-fault termination due to the employer’s operational requirements—economic, technological, or structural needs. The employee hasn’t done anything wrong; the employer simply cannot afford or no longer needs their position.
Can employees refuse to be retrenched?
You cannot refuse a lawful retrenchment where the process is fair and operational need is genuine. However, you can challenge the fairness of the process, selection criteria, or whether genuine alternatives were considered. If the CCMA or Labour Court finds unfairness, remedies include reinstatement or compensation.
Is severance pay taxable in South Africa?
Yes, severance pay is taxable income. However, SARS provides certain exemptions: the first R500,000 of severance pay (combined with other lump sums from retirement or employer provident funds) is tax-free. Amounts above this are taxed at retirement lump sum rates. Consult a tax professional for your specific circumstances.
How much severance pay am I entitled to receive?
The statutory minimum under Section 41 of the BCEA is one week’s remuneration for every completed year of service. Your employment contract, company policy, or collective agreement may provide for more generous severance—if so, you’re entitled to the higher amount. Severance is separate from notice pay and accrued leave payout.
Do I still get paid notice during retrenchment?
Yes. The employer must give you notice under Section 37 of the BCEA (1, 2, or 4 weeks depending on length of service) or your employment contract, whichever is longer. Notice can be worked or paid in lieu. Notice pay is separate from and additional to severance pay.
Sources
- Labour Relations Act 66 of 1995: Sections 189 and 189A on dismissals based on operational requirements
- CCMA: Facilitations in terms of Section 189A information
- Basic Conditions of Employment Act: Section 37 (notice) and Section 41 (severance pay)
- Labour Guide South Africa: Retrenchments – back to basics
- Bowmans Law: Section 189 – a holistic retrenchment playbook for employers
