Category SMMEs

Five cost cutting measures to sustain your business and safeguard your employees

29 April 2020 Verushka Reddy, Kriyanka Reddi and Mandisa Duma, Norton Rose Fulbright

The declaration of a state of national disaster due to COVID-19 and the resulting nationwide lockdown has left employers and employees in a precarious situation. The lockdown has had a devastating impact on employment throughout the country, with many employees feeling the financial pinch of not having worked throughout the lockdown.

What is clear is that employers are legally not obliged to remunerate employees, in instances where their employees are not able to work on account of the lockdown. The impact on businesses has been equally devastating, with many employers actively seeking measures to sustain their business viability and safeguard their employees from job-losses.

Below are five potential cost-cutting measures to assist:

1. Activating ‘short-time’ employment

Every contract of employment contains provisions relating to the employee’s ordinary hours of work and commensurate remuneration. The employer cannot unilaterally change the terms set out in the contract of employment where an employer intends reducing an employee’s work hours in order to reduce remuneration payable. Employers must obtain their employees’ consent to activate short-time commensurate with reduced remuneration. Similarly, in instances where employers intend on reducing salaries, without necessarily reducing the work hours, the employees’ agreement is required. This is applicable to employees working on indefinite and fixed term employment contracts and it applies equally to senior and lower level employees.

2. Temporary lay-offs or short-time

A temporary lay-off allows an employer to effectively suspend or pause an employee’s contract of employment for a limited period of time, without terminating the employment relationship. Some bargaining council agreements, collective agreements and employment contracts make provisions for temporary lay-offs. In the absence of any agreement, employers may not impose these measures unilaterally. Employers and employees may agree to a temporary lay-off (that is, where the employment contract, and payment of remuneration is suspended for a defined period of time) or short-time (that is, where the employees work rotationally, on a schedule; or daily with reduced hours). Implementing short-time also requires employees’ consent. Employers and employees impacted by temporary lay-offs or short-time may claim under UIF – TERS benefit.

3. Leave

Employers have, over this period, requested that their employees take their accrued annual leave in order to ensure that the employees are able to receive some remuneration, despite not having worked over the lockdown period. Section 20 (10) (b) of the Basic Conditions of Employment Act 1997 (BCEA) provides that, in the absence of an agreement, annual leave must be taken at a time determined by the employer.

In the event that the employee has not accrued sufficient leave, employers may permit the employee to use ‘negative’ leave (leave that has not yet accrued). Where employers intend to allow employees to use negative leave, the employer must bear in mind that it would only be applicable to annual leave. While the employer could negotiate that the employee is precluded from taking any further annual leave for the remainder of the year, the employer cannot prevent the employee from using his or her other statutory leave (sick leave, maternity leave or family responsibility leave) if required in the future.

Where employees were placed under self-quarantine by their employer prior to the lockdown, such leave may qualify as special leave and the employee would be entitled to apply for UIF benefits on the condition that the reason for the quarantine meets the UIF’s requirements.

If placed under quarantine by a medical practitioner prior to the lockdown, such leave qualifies as sick leave. Subject to section 23 of the BCEA, employers must pay their employees for the days that the employee was on sick leave. If sick leave was exhausted (30 days over the 36 month cycle), employers are not required to pay those employees.

4. Restructuring and retrenchment

The reality is that, even with the application of cost cutting measures, employers may not be in the position to financially recover from the pandemic and its effects. This may lead to the employer restructuring the business and having to retrench its employees.

Section 189 of the Labour Relations Act 1995 (LRA), and section 189A if applicable, sets out the procedure for employers who are contemplating retrenchment for reasons based on operational requirements. Employers must engage in a proper consultative process with their employees (which may be done electronically). In this regard, employers must bear in mind that there is a statutory obligation to pay employees severance pay, namely one week’s pay for every year worked for the company, except if an employee unreasonably rejects an alternative offer of employment. Engaging in an immediate, large-scale retrenchment exercise, may culminate in an employer having to pay significant amounts of severance pay. This approach must therefore be carefully considered.  Adopting a phased approach to retrenchments may be preferable, but an employer must be mindful of its obligation to commence consultations as soon as it contemplates that it may have to retrench employees.

5. Reducing operational expenditure

Evaluating operational expenditure is good practice.

Recently, and with numerous employees demonstrating their capacity to work remotely, employers now have the option of downsizing to smaller office spaces and/or moving their business operations to less expensive areas, if any lease allows it. This will significantly reduce one of the largest components of the business’s operational expenditure. The basic, day-to-day expenses involved in renting and maintaining large office spaces can often be the easiest expense to cut in times of financial distress.

By using video conferencing technologies, companies may also see reductions in telephone expenditure. Companies that intend on using technology must ensure that they have adequate information security measures.

This may also be the right time for employers to embrace budget- and environmentally- friendly solutions, for example, by switching to a paperless office. This could be done through something as simple as an office-wide ban on printing anything that could reasonably be reviewed or disseminated digitally.

Employers should be pro-actively assessing and implementing cost cutting measures they can employ.

First published by: Financial Institutions Legal Snapshot


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