When Cost-Cutting Costs You: Lessons From A Botched Section 189 Process

Barnard's labour experts recently stepped in after a midsized landlord tried to trim expenses by releasing ten employees. The board believed the numbers justified the move, but in its haste to "save the business," management skipped several of the steps that South Africa's Labour Relations Act (LRA) demands. Within weeks the company faced a CCMA referral for unfair dismissal and a potential compensation order running well into seven figures – far higher than the savings it had hoped to bank.

That real-life dispute offers a cautionary tale for any employer contemplating retrenchment. Dismissals for operational requirements are absolutely lawful, yet the LRA sets a strict procedural roadmap. Deviate from it and the dismissal becomes automatically unfair, regardless of how dire your balance sheet looks. Below, we unpack the essentials of a fair Section 189 process, highlight common traps encountered, and suggest practical safeguards executives can implement long before the first retrenchment letter goes out.

Why procedure matters more than the numbers

Section 189 of the LRA obliges employers to prove both a fair reason and a fair procedure when retrenching. The distinction is critical. Even where declining orders or technology changes clearly justify staff reductions, the employer must still consult, disclose information, and seek consensus on alternatives. If the process falls short, the Labour Court or CCMA may order reinstatement or up to 12 months' remuneration per employee, plus costs – an outcome that can wipe out any budget relief, in addition to personal liability for the top brass.

Courts also weigh reputational harm. Shareholders tend to look past temporary losses; clients and trade unions remember employers who appeared indifferent to workers' rights. Following the letter (and spirit) of Section 189 is therefore as much a brand-protection exercise as a compliance one.

The building blocks of a lawful Section 189 retrenchment

1. Identify which regime applies – Section 189 covers most retrenchments, but large-scale dismissals (the headcount or threshold is set in Section 189A) trigger heavier obligations, including mandatory facilitation or balloting. Before drafting any correspondence, confirm which section governs your numbers.
2. Facilitate genuine consultation meetings – Consultation is not a single event; it is a process of joint problem-solving aimed at avoiding dismissal where possible. Management should table financial statements, workflow analyses, or order books that illustrate the operational need, then keep detailed minutes of every meeting. Allow enough time for counter-proposals – compressed timelines are a red flag.
3. Issue a comprehensive Section 189(3) letter – The Act lists eight categories of information you must disclose in writing to the affected employees or their union. Those items include the reasons for dismissal, proposed selection criteria, severance calculations, and the contemplated timing. Crucially, the letter must go out before decisions are made, so that consultation is genuine rather than a rubber-stamp. Pull quote: "A Section 189(3) letter sent after the board signs a termination memo is the legal equivalent of locking the barn door after the horse has bolted."
4. Apply objective selection criteria – "Last-in-first-out" remains the default because it is objectively verifiable, but employers may deviate when specialised skills are scarce, provided the rationale is documented and communicated from the outset. Mixing subjective and objective metrics without clarity is where many cases unravel.
5. Explore alternatives to dismissal – Courts routinely examine whether reduced hours, temporary salary cuts, voluntary severance, or redeployment were considered. Even if employees reject a proposal, the fact that it was tabled and minuted demonstrates good faith.
6. Give proper notice and pay statutory benefits – Once consultation ends – either by agreement or stalemate – you must issue termination notices that match contractual or statutory minimums, pay severance at one week's remuneration per completed year of service, and settle accrued leave. Delays or under-payments undo all the procedural diligence that came before.

Practical safeguards for HR and management

Start early, document everything – Once possible retrenchments appear on the horizon, open a dedicated audit file. Every draft letter, financial spreadsheet, and meeting minute should land there.

Use plain language – Section 189 communications must be intelligible to non-lawyers or union stewards. Over-legalistic wording erodes trust and invites challenges.

Bring Finance to the table – Accountants can explain underlying cost drivers and validate savings claimed in alternative proposals. Their presence signals transparency.

Apply criteria uniformly- Where you need mixed criteria – skills plus LIFO, for example – publish weightings in advance and stick to them. Any deviation must have a written, non-discriminatory justification.

Audit Payroll Systems ahead of time – Mis-calculating severance or omitting accrued leave wages is an easy way to lose credibility at the 11th hour. Have payroll run simulations as soon as potential retrenchment numbers are identified.

Retrenchment need not be adversarial. Most employers genuinely wish to treat staff fairly while safeguarding the enterprise. Ironically, the pressure to cut costs often tempts leaders to abbreviate process – precisely the choice that exposes them to the largest financial backlash. Barnard's recent matter shows that meticulous, transparent consultation, though time-consuming, is still cheaper than paying for a procedurally unfair dismissal.