Retrenchments for profit

Source: Talita Laubscher, partner Bowman Gilfillan Inc

There has for some time been a debate in our law on whether an employer is entitled to cut jobs in order to increase its profits. On the one hand, it is argued that an employer may resort to retrenchments only where it is necessary for the survival of the business. On the other hand, the ‘operational requirements’ of a business as defined in the Labour Relations Act 66 of 1995 (LRA) are said to entitle the employer to reduce the wage bill in order to increase profits for the shareholders.

In General Food Industries Ltd v FAWU [2004] 7 BLLR 667 (LAC) the Labour Appeal Court, per Nicholson JA (Zondo JP and Jafta AJA concurring), finally put this debate to rest when it held that the LRA recognises the right of an employer to dismiss employees for a reason based on its operational requirements without distinguishing between a business struggling to survive and a profitable business wanting to increase its profits. It stated that

‘a company is entitled to insist by economic restructuring that a profitable centre becomes even more profitable’.

In this case, the appellant acquired the business of Premier Food Industries (PFI) in 1998, which resulted, inter alia, in a duplication of mills. The wages of the ex-PFI employees were also considerably higher than those of the appellant’s employees. Furthermore, outsourcing was widely used in the industry resulting in the appellant’s wage bill being considerably higher than that of its competitors. During the centralised wage negotiations between the appellant and the union in 1999, these problems were explained to the union and the union was effectively requested to persuade its members to lower their wages or face retrenchment.

In particular, at the appellant’s Salt River mill, the appellant required more flexibility in working hours and, in order to remain viable, the appellant needed to increase its profitability from 5,9% to ten per cent. The appellant believed that these objectives could be achieved through outsourcing and it subsequently approached the Salt River mill shop stewards with this suggestion. Initial discussions were unsuccessful and in November 1999 the appellant issued a retrenchment notice and commenced consultations. It was expected that the proposed outsourcing would result in a reduction in wage costs of about 48% per month. The shop stewards did not consult meaningfully but contended that the consultations had to take place at national instead of plant level. After four consultation meetings, the appellant gave notice of termination.

The respondent referred a dispute to the Labour Court and contended that the employees’ dismissals were automatically unfair because the reason for the dismissal was to compel them to accept a demand for lower wages. Alternatively, the union alleged that the dismissals were substantively and procedurally unfair. The Labour Court held that the dismissals were automatically unfair and ordered the employees’ reinstatement.

Before the Labour Appeal Court, the respondent accepted that in view of the decision of NUMSA v Fry’s Metals [2003] 2 BLLR 140 (LAC), the Labour Court’s finding that the dismissals were automatically unfair could not stand. The only question before the LAC was therefore whether the dismissals were substantively and procedurally fair.

In relation to substantive fairness, the LAC held that the appellant had a fair reason based on its economic needs to retrench. As to procedural fairness, the respondents complained that consultations did not take place at national level. The LAC held that the question in this respect was whether consultation at plant level rendered the process unfair. The LAC held that it did not. It said that it was up to the respondent to have included high-ranking officials in its consultation delegation to ensure effective consultation. In any event, the appellant did discuss its predicament as regards its high wage bill at national level, but to no avail. As to whether the appellant presented the respondent with a fait accompli when it commenced consultations, the LAC held that although the appellant approached the process with a strong view about outsourcing, there was no evidence to suggest that it was not open to consider other possible solutions. In the circumstances, the LAC held that the retrenchments were fair, and upheld the appeal.