As a director you have both the power and the duty to manage your organisation in its best interests.

What happens though if you need to consider the possibility of retrenching staff for operational requirements? How does that tie in with the very extensive rights afforded to your employees by our labour legislation?

A recent Labour Appeal Court judgment addressed the question of whether, when entering into the necessary consultations with staff and/or unions, you are entitled to have first formed a prima facie view on the matter. Is that necessarily fatal to your obligation to take part in a “joint consensus-seeking process”?

The Companies Act gives directors wide powers to manage the organisation – the Act states “The business and affairs of a company must be managed by or under the direction of its board”. In a recent case a furniture company ran into economic difficulties and resolved that it needed to cut costs by reducing staff in its stores.

The company then issued a Section 189(3) Notice to the main union of employees – this is a Labour Relations Act stipulation that employees be notified when the company, for operational requirements, considers reducing staff numbers.

The Labour Relations Act states there must be consultation between management and employees and “the employer and the other consulting parties must, in the consultation envisaged …, engage in a meaningful joint consensus-seeking process and attempt to reach consensus on – (a) appropriate measures – (i) to avoid the dismissals; (ii) to minimise the number of dismissals; (iii) to change the timing of the dismissals; and (iv) to mitigate the adverse effects of the dismissals”.

Accordingly the company began an intensive process of meetings with the union – four meetings were held, information asked for by the union was given and the company considered all union proposals, including one that actually reduced the number of staff retrenched.

The union’s reaction

One of the documents forwarded to the union was the resolution to reduce staff. The resolution read “…as a result of the ongoing poor economic trading conditions, …the Group must further reduce store staff numbers through operational requirements to reduce operational costs.”

The union read this as the company already having made the decision to retrench staff and that it was merely going through the motions of consulting with employees.

What the Labour Appeal Court said

The Labour Court’s judgment was in favour of the company and this was appealed. Again, the Labour Appeal Court found in favour of the company.

A company, it held, is fully entitled to “…to form a prima facie view on retrenchments, even a firm one, provided it demonstrates and keeps an open mind in the subsequent process of consultation.”

The steps the company took in terms of meetings, considering union proposals and supplying the information the union asked for demonstrates that management fulfilled its obligations to take part in a “joint consensus-seeking process”.

This judgement gives a degree of certainty when approaching retrenchments – act in good faith as per the law and you stack the odds in your favour of getting affirmation from the Courts. It also highlights the fact that there need be no conflict between directors acting in the best interests of the company and Labour law.

As always with our labour laws, there are complex issues at play here and the cost of getting them wrong is high. Seek professional advice on your specific circumstances!