Employers must be transparent in restructuring consultations, says South African court

In this increasingly interconnected world, emerging markets like South Africa present a wealth of opportunities for multinational corporations seeking to broaden their international reach. However, businesses are facing increasingly shifting economic landscapes, not least the implementation and uncertainty triggered by tariffs imposed by the US, which is South Africa’s second-largest trading partner. Under the Trump administration’s new tariff regime, from 7 August products exported to the US are subject to a 30% tariff.

As organisations navigate these challenging economic dynamics, they are also grappling with the challenge of maintaining financial efficiency while upholding their responsibilities to employees and broader society.

In the face of these global trade headwinds, multinational corporations may find that restructuring their operations and workforces may also be necessary to realign operations with broader international business objectives.

The restructuring process initiated by Goodyear South Africa to close its manufacturing facility in the Eastern Cape and the realignment of certain sales, administration and general management functions is a prime example.

Goodyear recently announced it was closing its operations, putting more than 900 jobs at risk. The move was reportedly part of a broader restructuring of its operations in Europe, the Middle East and Africa (EMEA) to adapt to new market conditions.

Although the company concluded an agreement on the retrenchments, it required Goodyear to provide an enhanced severance package. This agreement has brought closure to what could have been a fraught situation, and possibly lengthy court challenges infused by issues such as those raised in the recent case of HeroTel (Pty) Ltd v Moses and Others(‘HeroTel’).

In cases such as Goodyear, where a company’s presence plays a critical role in the economic wellbeing of the local community, it is imperative for this type of transition be handled with sensitivity, transparency, and strict adherence to the provisions of sections 189 and 189A of the Labour Relations Act (LRA). Meaningful consultation with employees in this regard is not only a legal requirement, but a vital step towards preserving trust throughout times of change. 

The Labour Appeal Court’s (LAC) recent judgment in the HeroTel case underscores the critical importance of transparency during the consultation process. As a result, employers should disclose the reasons for any proposed restructuring at the outset of the consultation process, especially where retrenchments are based on economic or financial reasons. Failure to communicate the company’s purpose behind a restructuring not only undermines the capacity of employees to engage meaningfully, it also places the company at risk of a finding that retrenched employees have been unfairly dismissed.  

Employer obligations under the Labour Relations Act

When an employer contemplates dismissing employees based on its operational requirements, including economic, technological, structural or similar needs, the retrenchment must be both substantively and procedurally fair. Consultation plays a key role in this respect. 

Substantive fairness in retrenchment consultations imposes a clear obligation on employers to engage meaningfully with any alternatives to dismissal proposed by employees or trade union representatives. Courts have consistently held that employers must go beyond mere acknowledgment. They must provide reasoned, evidence-based responses that demonstrate genuine consideration of each alternative.

The employer’s duty to consult with employees or trade union representatives is paramount in the context of procedural fairness, with the ultimate purpose of this exercise being to achieve consensus on appropriate measures to mitigate the impact of the retrenchment. These include measures to avoid the dismissals; minimise the number of dismissals; change the timing of the dismissals; and mitigate adverse effects of the dismissals, as well as to identify the method of selecting employees to be dismissed and the severance pay for dismissed employees.  

The duty of the employer to disclose information is integral to the consultation process. This requires the employer to disclose all relevant information that will allow the employees and their trade union representatives to engage effectively in consultation.  

When a consultation process is investigated by a court, the goal is not to second-guess the commercial or business efficacy of the employer’s ultimate decision, but to decide on whether the ultimate decision arrived at was genuine and not merely a sham. Retrenchments are a matter of last resort.

The HeroTel case

In 2020, the HeroTel Group announced that four of its entities, including its subsidiary, Fusion Wireless (Fusion), would be affected by a retrenchment exercise. Fusion issued a written notice in terms of the LRA, inviting employees and/or their trade union representatives – the ‘affected employees’ – to consult.

The notice cited Fusion’s poor financial position as the reason for the proposed retrenchments. During consultations, however, the affected employees challenged this justification. They contended that the retrenchment was driven not by financial distress, but by intercompany restructuring transactions within the HeroTel Group. These transactions allegedly included the sale and transfer of key revenue-generating assets to HeroTel, which adversely impacted Fusion’s financial stability. 

To support their claims, the affected employees requested financial records relating to Fusion’s transactions with the HeroTel Group and its subsidiaries. Although the Commission for Conciliation, Mediation and Arbitration (CCMA) – South Africa’s independent tribunal that adjudicates labour disputes – directed Fusion to provide four years of financial documentation, including details of intercompany dealings, Fusion failed to comply and a draft, unaudited statement was provided. Following their dismissal, the affected employees referred an unfair dismissal dispute to the CCMA for conciliation. The matter was eventually escalated to the Labour Court (LC) for adjudication.

The Labour Court’s findings

The LC concluded that Fusion’s financial restructuring, marked by the redirection of funds to the HeroTel Group and the gradual transfer of its business, ultimately led to the voluntary liquidation and section 197 transfer of the business as a going concern under the LRA. This sequence of events strongly supported the affected employees’ assertion that the retrenchments were a ‘fait accompli’ – a predetermined outcome executed without meaningful consultation.  

The LC also found no evidence that fair and objective selection criteria had been used or that any alternatives to retrenchment had been considered. On this basis, it was found that the dismissals were substantively unfair, and the affected employees were retrospectively reinstated.  

Appeal to the Labour Appeal Court

In its appeal against the LC’s judgment, HeroTel contested the finding that the retrenchment of the affected employees was substantively unfair.  

The LAC highlighted discrepancies between Fusion’s claims and its conduct. Although Fusion cited financial distress in the notice, the affected employees’ submissions illustrated that Fusion had begun transferring business operations to the HeroTel Group as the holding company before, during and after the retrenchment process. These actions included:  

• a unilateral decision to discontinue providing services in terms of Fusion’s reseller agreements, which had generated significant revenue for the business;
• a transfer of Fusion’s clients to HeroTel a few months before the written notice was issued;
• the levying of a significant administration and management fee which had not been imposed in previous years and where no evidence existed that actual expenses had been incurred between the group entities; and
• a notable increase in the rental and management fees paid to the HeroTel Group.

The LAC noted that procedural and substantive fairness requirements in dismissals for operational requirements are deeply interconnected. In this case, the reason for the dismissal was so closely linked to the disclosure of financial information, which was sought during consultation, that the two requirements could not be separated.

The actions undertaken by Fusion prior to issuing the notice, including the transfer of revenue-generating units and the cancelling of key contracts, contradicted its claims of a financial downturn and client churn.

LAC found that the financial hardship experienced by Fusion was largely self-induced and the notice did not accurately reflect the true motivation behind the dismissals, which was restructuring through business transfer.

The LAC did not dispute that the reasons given in the notice were untrue: the notice simply did not outline the entirety of Fusion’s financial position and was not a true reflection of the reason for the contemplated dismissals. On the contrary, it was the movement of various business units to the HeroTel Group which prompted the retrenchment of the affected employees.

The LAC went on to emphasise that Fusion had the right to restructure and, had it explained at the outset that the reason for the retrenchment was that it wished to restructure its business, its actions may have been justified. However, as economic and financial reasons were put forward as the reason for retrenchment, and the reality of what took place was not linked to this, the retrenchments were found to be substantively unfair. The appeal was accordingly dismissed.

The value of community consultation

The HeroTel decision reaffirms that while employers retain the prerogative to restructure their businesses in alignment with strategic objectives, this must be exercised with transparency and procedural integrity.

In instances when restructuring constitutes the true reason for retrenchment this must be openly disclosed at the outset of consultation. Even though restructuring can be a legitimate operational requirement, international companies considering restructuring their operations in South Africa should take heed of the HeroTel decision and ensure all relevant information is provided during the consultation process to ensure that it results in a meaningful and joint consensus-seeking process. Employers will also need to focus on making sure that their notices in terms of section 189(3) of the LRA accurately reflect the true reason for the proposed restructuring or retrenchment.

Co-written by Kassandra Vercueil of Pinsent Masons