Retrenchment as an effective business tool


According to the University of Cape Town, 4 899 firms in South Africa retrenched employees from January 2008 to January 2009, with the majority of retrenchments occurring in companies with less than 50 employees.

This is therefore a topical issue for small businesses. Retrenchment or downsizing is a viable turnaround strategy for firms of all sizes.

Circumstances that give rise to retrenchment include a change in the business’ operating model which requires fewer staff or staff with different skills, or a difficult trading environment which necessitates cost-cutting to keep the business afloat. This does not mean that retrenchment should be the first recourse for small business owners. On the contrary, retrenchment should be the last resort after other options have been explored (e.g. lowering employee salaries).

There is a different between retrenchment and redundancy – a position becomes redundant when its duties are no longer required to be performed by anyone. When this happens, the affected employee may be retrenched or offered another position in the business. Retrenchment can be implemented en masse (i.e. on a large scale), or employee by employee depending on the small business’ situation. Small business owners also have the option to re-hire retrenched employees when the business’ circumstances improve. This is one of the reasons small business owners should aim to manage the process as fairly and amicably as possible.

For the ‘surviving’ employees who remain employed, retrenchment can induce fear and uncertainty, particularly if a phased approach is adopted. On the upside, employees may exhibit renewed dedication to the business to secure their positions. On the downside, employees may lose confidence in the business and start looking for other opportunities, potentially exacerbating the business' difficulties and hampering it's recovery.

In South Africa, retrenchments must be conducted in accordance with the Labour Relations Act. Failure to do so could result in cases being referred to the Council for Conciliation, Media and Arbitration (CCMA) or the Labour Court on grounds such as discrimination and procedural discrepancies.

A well-thought through and legally compliant retrenchment plan or strategy would not be amiss for small business owners.

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