Bottom line
The Labour Appeal Court (LAC) accepted that the employer had a genuine commercial rationale for restructuring but still found the dismissals substantively unfair because the employer could not defend the selection of the employees retrenched.
The facts
Edge Line Engineering manufactured electrical substations and kiosks for clients such as municipalities and Eskom. Its work was tender-driven and fluctuated. In March 2019, after recording significant losses, it commenced a section 189A retrenchment process. The proposed restructuring focused on the powder-coating department and ultimately led to the dismissal of 15 AMCU members. AMCU challenged the retrenchments on the basis that the employer had not properly considered alternatives, that some employees could have been absorbed elsewhere, and that the selected employees appeared to have been targeted because they were AMCU members. The Labour Court found the dismissals substantively unfair and ordered retrospective reinstatement. Edge Line appealed.
The Court’s analysis
The LAC drew an important distinction between the employer’s business rationale and the fairness of its selection process. On commercial rationale, the Court held that it is not for a court to second-guess the wisdom of an employer’s operational decision. The enquiry is whether the decision is genuine, commercially rational and not a sham. On the evidence, including the company’s financial losses and its explanation that outsourcing would reduce overheads and improve liquidity, the LAC held that the Labour Court had not properly engaged with the employer’s justification. The finding that the retrenchment lacked a commercial rationale could therefore not stand.
Why the dismissals were still substantively unfair
The employer’s difficulty was not the decision to restructure, but the inability to explain who was selected for dismissal and why. The employer bore the onus of proving that fair and objective selection criteria were applied. It failed to do so. The initial list of potentially affected employees included people who were not in the powder-coating department, including managerial and administrative employees, who were later removed without a convincing explanation. The employer could not explain why 11 employees in the same department were retained while the 15 affected employees were dismissed. It also failed to show that it compared employees’ length of service, skills or experience, or that it genuinely applied LIFO. Nor did it properly consider redeployment, transfers or bumping, despite evidence of cross-over between departments. The LAC therefore upheld the finding of substantive unfairness on the basis of flawed selection criteria.
Remedy
Although reinstatement is the primary remedy for a substantively unfair dismissal, the LAC held that reinstatement was impracticable on the facts. The employer’s undisputed evidence was that it had outsourced its manufacturing and production operations and no longer had positions into which the employees could be reinstated. The reinstatement order was replaced with compensation equivalent to 12 months’ remuneration for each affected employee.
Case takeaways
For employers, the case is a reminder that a sound business case is only half the retrenchment enquiry. If employees are selected for retrenchment, the employer must be able to demonstrate, with contemporaneous evidence, the objective criteria used and how those criteria were applied. Retained and retrenched employees should be capable of being distinguished on defensible grounds. Employers should document the selection matrix, record why alternatives such as redeployment or bumping were not feasible and be able to explain any departure from LIFO or any retention of employees in the affected area. In short: do not only prove the need to restructure; prove the fairness of the choices made in implementing it.
