• Unemployment crisis and the increase in retrenchments
Articles:

Unemployment crisis and the increase in retrenchments

05 August 2016

Unemployment is a familiar burden of our age. Today’s world is characterised by globalisation, and the unemployment problem has become worldwide. It is endemic in both developed and developing countries. But for developing countries, this problem brings more challenges like increased poverty and complications such as political, economic and social instability. South Africa is certainly no exception.

According to The Cape Chamber of Commerce and Industry, the unemployment rate in South Africa increased to 26.7% in the first quarter of 2016 from 24.5% in the previous quarter, and above market expectations of 25.3%. It was the highest recorded since September 2005. The Cape Chamber of Commerce and Industry cautioned that the rise in the unemployment rate represents trouble for South Africa in two different ways; firstly, having nearly six million people out of work creates a massive social problem with consequences that are difficult to predict and, secondly, it underlines the poor performance of the economy.

One big factor that contributes to the low employment rate is retrenchments. With retrenchments on the rise, the country is headed towards tough times, both socially and economically. There are several factors and circumstances that businesses are faced with that would necessitate the need to retrench staff, and both companies and staff need to be aware of them. Tinus Jansen van Vuuren, Audit Partner at BDO lists some of them below:

  • Low economic growth which will probably result in no revenue growth or a decline in revenue
  • Need to save on specific company costs such as employee costs as a result of an increase in other costs which might be out of the company’s control
  • In the manufacturing industry, there is a need to move towards a more automated method of manufacturing – to improve efficiencies, consistency and potential quality of product
  • Companies being overstaffed or duplication of certain employment positions. This might happen after a merger of two companies, or an acquisition
  • Increased competition. It might be that the company’s current staff mix does not match the requirements of the current client base/requirements of the market.
  • Increased need to diversify and/or change work force to comply with business needs or regulatory requirements such as B-BBEE / employment equity regulations
  • Discontinued product lines or services which result in redundancies
  • Some international countries offer the same services at a lower cost and therefore certain work, such as accounting and finance, can be outsourced

“The low economic growth in the country is affecting a lot of businesses, especially in areas that are out of their control such as forex losses, commodity prices, increasing electricity rates, low growth in revenue and cost of compliance, most of these businesses end up retrenching staff as they tend not to seek advice until it’s too late, reason being that consulting experts is normally a significant expense, which management try to avoid, thus they opt to handle it themselves, sometimes successfully, but most times not,” states Jansen van Vuuren

Retrenchments affect staff and companies in different ways. The effect on staff is that retrenchments are demoralising. Employees who remain usually suffer from ‘survivors’ guilt which in-turn leads to employees questioning their commitment to the company, reduced levels of trust amongst staff, doubts relating to job security and even an increase in staff turn-over which only makes the unemployment crisis in the country worse.

On the other side of the coin, the effect on the company is the loss of skilled employees that the company investment time and money to train. Retrenching staff places increased pressure of remaining staff and may result in lower customer satisfaction. Customers could also change their perception on the company as they could be seen as “greedy”, especially when customers have built relationships with key employees. Sometimes companies assume that one person can handle the workload previously assigned to two people, which could very easily lead to an increase in errors. Companies also don’t think about the unknown/hidden costs involved in retrenchment, such as legal fees, overtime pay-outs, cost of errors, loss in staff morale and loss of customers.

“It is a vicious cycle because the retrenchment of staff decreases people’s spending power, which has terrible effects on the economy. This in-turn will decrease revenue for companies,” states Jansen van Vuuren. “An economy with a lot of unemployed people puts a strain on the working and tax paying community as the unemployed rely more on the employed,” he continues.

Large companies often have alternatives to retrenchment, such as redeploying staff, seeking guidance from consultants or in-house legal departments to oversee legal matters. Family-owned businesses, generally, do not have these alternatives and will have to make use of consultants coming at an additional cost. These companies often rely on the brand that they have built, and part of the brand is the people who helped to build it. “Losing these people, especially through retrenchments, may have an impact on the brand. With larger companies, this individualism is not as important, as the employees are often small cogs in a big machine,” says Jansen van Vuuren.

It is advisable for companies to explore their options before making the decision to let people go. There are also several legal requirements in terms of South Africa’s Labour Relations Act that the company needs to comply with before retrenching employees. Jansen van Vuuren notes the below options as possibilities before making the decision to retrench staff:

  • Reducing employees’ remuneration, this could also mean agreeing to foregoing a 13th cheque or foregoing salary increases
  • Conclude agreements with bargaining councils/unions which cover longer periods that are favourable to employees and the company
  • Reduction in employee working times (reduce the amount of overtime worked if possible)
  • Voluntary termination
  • Forcing employees to take leave instead of paying out overtime or leave (a few companies are already doing this)
  • Consider re-deploying current staff to other areas of the business (only if the cost of training is not excessive)

“It is always advisable to seek guidance from business rescue specialists. Although some companies find them costly, the alternative could cost a lot more in the long-run,” concludes Jansen van Vuuren.

Read more BDO Insights