If an employer contemplates dismissing employees based on operational requirements (retrenchment), the Labour Relations Act (LRA) requires the employer to follow certain procedures. However, may an employer approach employees informally and strike a deal by signing a mutual separation agreement, thereby avoiding the legal technicalities of the LRA?

In the case of WBHO Construction (Pty) Ltd v Mdiya and others (2024), the Labour Court found that employers may not use a mutual separation agreement to circumvent the procedure set out in section 189 of the LRA. But what does this mean?

Facts in the WBHO case

WBHO employed Mr Mdiya in April 2018. During November 2020, a senior executive of the company, a Mr Gray, approached Mdiya during a site visit and discussed the company’s operational requirements.

The possible transfer of Mdiya to another location in the Northern Cape was raised because his skills were allegedly needed there. Mdiya was not willing to agree to the transfer.

The company and Mdiya signed a “mutual separation agreement”. The matter was not handled by the HR Department as had been the case with previous retrenchments. The document recorded that “[w]e confirm recent consultations held and wish to inform you that your retrenchment date will be on December 1, 2020”. The document gave details of the severance package and ended off with the words “I hereby acknowledge and accept the above retrenchment in full and final settlement of all or any claims that I as the employee may have.”

After having signed the document, Mdiya had second thoughts. He argued that he had been misled to sign the agreement. He also argued that the agreement “was signed under misrepresentation and duress”. Mdiya referred an unfair dismissal dispute to the relevant Bargaining Council.

The Arbitration award

The Arbitrator appointed by the Bargaining Council found that

“[t]he document which both parties signed to confirm the end of their employment relationship, was more of [a] retrenchment letter detailing the retrenchment package the Applicant would receive rather than a mutual separation agreement” and that “[t]his document (signed by both parties) is titled mutual separation agreement, however its contents are all about retrenchment and the benefits of a retrenchment package … Even at the last page of the document, it is confirmed that the Applicant was retrenched. It was signed by someone else who did not seem to be Mr Gray.”

The Arbitrator found that the company had not followed any retrenchment process as required by section 189 of the Labour Relations Act (LRA). In addition, the Arbitrator found that Mdiya had been “pushed or dismissed” and that there had been no reason to terminate his services. The dismissal was therefore found to be procedurally and substantively unfair. The company referred the arbitration award for review to the Labour Court.

The Labour Court

The Court agreed with the Arbitrator that, once the employer had entered into a discussion with Mdiya concerning the company’s operational requirements, the company was obliged to follow the legally prescribed procedures. According to the judge, the words “the employer must” in section 189(1) of the LRA are peremptory, and therefore, the applicant ought to have invoked the procedure it provides for. 

The Court found that the reference to a “retrenchment package” in the agreement confirmed that the company intended to retrench Mdiya and merely used the agreement to circumvent the section 189 process. This meant that “[t]he [Arbitrator’s] decision, that the procedure for retrenchment was not followed and that the dismissal was procedurally and substantively unfair, is one that a reasonable decision maker would have arrived at.”

The review application therefore failed and the company had to reinstate Mdiya with retrospective effect and pay his legal costs.

What does this mean in practice?

The message in the WBHO case is clear: If an employer contemplates the possibility of dismissal for operational requirements (retrenchment), the employer is obliged to follow the procedures provided for in section 189. This starts off with a “written notice” to the consulting party or parties, followed by genuine consensus-seeking consultations on all the relevant aspects listed in section 189(3).

It is noteworthy that the Labour Court has in some cases in the past adopted a less formalistic approach. The factual circumstances in these cases led the Court to conclude that there had been “substantial compliance” with the provisions of section 189, letting the employer off the hook even though there had not been strict adherence to those provisions.

However, in light of the WBHO case, employers are advised to follow the provisions of section 189 to the letter in all circumstances where retrenchment is contemplated.

Written by Jan Truter for www.labourwise.co.za