Retrenchments: getting the section 189 process right

Retrenchment is one of the hardest decisions an employer makes. When trading conditions deteriorate, a contract is lost or the business restructures, reducing headcount may be unavoidable. But the way it is done matters as much as the reason for it. A retrenchment that is rushed or handled as a formality can lead to unfair dismissal claims, reinstatement orders and compensation awards that make the financial position worse.

The rules are set out in section 189 of the Labour Relations Act 66 of 1995 (LRA), with additional requirements in section 189A for larger retrenchments. Since September 2025, employers must also follow the new Code of Good Practice: Dismissal, which replaced both the old Schedule 8 code and the separate code on dismissals for operational requirements. This article explains what the process requires and where employers most often go wrong.

What counts as an operational requirements dismissal?

The LRA defines operational requirements as requirements based on the economic, technological, structural or similar needs of an employer. Typical examples include falling revenue, the loss of a major client, automation, the closure of a branch or a restructuring that makes certain roles redundant.

Retrenchment is a “no fault” dismissal. The employee has done nothing wrong. That is why the law places so much emphasis on consultation, fair selection and severance pay.

Step one: the section 189(3) notice

When an employer contemplates dismissing one or more employees for operational reasons, it must issue a written notice inviting the other party to consult. The notice must disclose relevant information, including:

• the reasons for the proposed dismissals;
• the alternatives the employer considered and why it rejected them;
• the number of employees likely to be affected and their job categories;
• the proposed method for selecting employees;
• the proposed timing of the dismissals;
• the proposed severance pay;
• any assistance the employer proposes to offer;
• the possibility of future re-employment; and
• the number of employees employed and the number dismissed for operational reasons in the previous 12 months.

The 2025 Code includes a prescribed format for this notice. Using it reduces the risk of omitting required information. The key word in section 189 is “contemplates”: consultation must start before a final decision is made. A notice that presents the outcome as a done deal is a common source of successful claims.

Who must be consulted?

The LRA sets an order of priority. The employer must consult the party identified in a collective agreement, failing which a workplace forum, failing which a registered trade union whose members are likely to be affected, failing which the affected employees or their nominated representatives.

Step two: meaningful consultation

Consultation is a joint consensus-seeking process. The parties must try to reach agreement on:

• measures to avoid dismissals, or to reduce the number of dismissals;
• ways to change the timing of the dismissals and to mitigate their adverse effects;
• the method of selecting the employees to be dismissed; and
• severance pay.

Alternatives may include redeployment, short time, reduced hours, voluntary severance packages, early retirement, freezing recruitment or cutting other costs. The employer must allow the consulting party to make representations, consider them and respond, in writing if the representations were made in writing. The employer is not obliged to agree with every proposal, but it must engage genuinely and be able to show that it did.

Step three: fair selection criteria

Selection criteria must either be agreed or, if not agreed, be fair and objective. Length of service, often applied as “last in, first out”, is a common objective criterion, sometimes adjusted to retain essential skills. Criteria that rely on subjective judgement, or that indirectly discriminate, will be closely scrutinised. Employers should apply the criteria consistently and keep a record of how each employee was assessed.

Step four: severance pay and notice

Under section 41 of the Basic Conditions of Employment Act 75 of 1997, an employee dismissed for operational requirements is entitled to severance pay of at least one week’s remuneration for each completed year of continuous service. An employee who unreasonably refuses an offer of alternative employment may lose this entitlement. Severance is in addition to notice pay, outstanding leave pay and any other amounts due.

Large-scale retrenchments: section 189A

Section 189A applies to employers with more than 50 employees that contemplate dismissing at least a set number of employees, counting dismissals in the previous 12 months. The thresholds are 10 employees for employers with up to 200 employees, rising in steps to 50 employees for employers with more than 500.

In these cases, a facilitator from the CCMA may be appointed, either at the request of the employer in its notice or of the employees’ representatives. Notices of dismissal may not be given until at least 60 days after the section 189(3) notice. Procedural disputes are dealt with by application to the Labour Court, and employees may in some circumstances strike over the substantive fairness of the retrenchment instead of referring a dispute.

Small employers

The new Code recognises that small employers may not have human resources capacity and allows less formal processes. That does not remove the obligation to consult. A small business must still give proper notice, share relevant information, listen to the employee’s proposals and consider alternatives before dismissing.

Common mistakes

• Deciding on the outcome before consultation starts.
• Using retrenchment to remove an employee whose real problem is performance or conduct.
• Failing to disclose relevant financial information.
• Applying selection criteria inconsistently.
• Re-hiring into the same roles shortly afterwards without considering the retrenched employees.

A practical retrenchment checklist

1. Document the business rationale and the alternatives considered.
2. Identify the correct consulting party.
3. Check whether section 189A applies, counting dismissals over the previous 12 months.
4. Issue a section 189(3) notice in the prescribed format under the 2025 Code.
5. Hold genuine consultation meetings, keep minutes and respond to written proposals in writing.
6. Agree or apply fair and objective selection criteria.
7. Calculate severance pay, notice pay and leave pay correctly.
8. Issue termination notices only after consultation is complete and, where section 189A applies, after the 60-day period.
9. Keep a record of the process and consider re-employment if positions become available.

How O’Reilly Law can help

We advise employers on restructuring and retrenchment, from assessing whether retrenchment is the right option to drafting section 189(3) notices, preparing for and attending consultation meetings, and calculating severance. We also represent employers in CCMA and Labour Court disputes arising from retrenchments, and advise employees who believe their retrenchment was unfair.

Contact us before you issue a section 189 notice.

Related reading: The new Code of Good Practice: Dismissal (2025) · Fixed-term contracts: when a temporary employee becomes permanent

This article is general information and not legal advice. Correct as at November 2026.