Small business survival in a tough South African economy: Alternatives to retrenchment

Jared Kruger

21 Jul 2019

Reading time: 9 min Featured post | Thought leadership articles

Some small businesses are fighting to survive in a very hostile South African economy. In these cases, when the books aren’t balancing, they feel forced to make big, job-threatening decisions for the betterment of their company. But, while retrenchment is certainly an option, it shouldn’t be the only one on the table.

When Redundancy Becomes Redundant

All startups have growing pains. Some days you may find yourself waist deep in new leads, but then there are those darker times when cash flow isn’t, well, flowing. Unfortunately, when the light doesn’t seem to be shining so brightly at the end of the tunnel, SMEs start trimming down on their expensive employee resources. However, resorting to retrenchment as a default solution to managing the books is, at best, a symptom of severe tunnel vision.

There’s no doubt that a business that has outgrown the need for certain skills has the legal prerogative to restructure. However, should the redundancy of a particular position always lead to the redundancy of a particular employee? Our answer: Nope.

SME and employee survival in the South African economy

Starting a business is easy – just register a name and Voila! – but growing it into something sustainable requires hard work in this country. In this article we carefully unpack the options of up-skilling employees, retrenching employees and other alternatives that can save your business in the long run.

The role of small businesses in the economy

The hump and why small businesses battle to get over it

How to retrench staff when it is a last resort

Keeping employees, and alternatives to retrenchment

The role of small businesses in the economy

Psst! Hey, South Africa. We need innovators, dreamers and savvy startups to drive our national economy. 

With an unemployment rate of 27.6%, unemployment in the country is now a national crisis. There isn’t a seat for everyone at the big corporate table, meaning the burden lies with SMEs to step up and help kick unemployment to the curb. Small companies have the power to help combat unemployment by:

– creating jobs for their industry

– contributing to national income 

– promoting social change, and 

– driving rapid transformation

However, small businesses in the country are still struggling… 

The hump, and why small businesses battle to get over it

Global Entrepreneurship Monitor (GEM) reports show that South Africa has one of the highest business startup failure rates in the world. Minister of Trade, Rob Davies, confirms that over 70% of new businesses fail in less than two years of being in operation.

But, why?

The issue of access to funding is often cited as the biggest and most critical component of SME growth. In fact, in a study carried out by In On Africa (IOA), only 6% of small business owners stated that they were able to secure government funding.

Other major issues SMEs are facing are access to competitive markets and securing the right skills in their business. The demand for certain skills far exceeds the supply of such skills. The country is suffering from an under-skilled population, which is evident in the high unemployment rate, despite numerous job vacancies. 

How to retrench staff when it is a last resort

Having assessed all of your options, retrenchment may be the best option for your business. In such a case, make sure you follow all legal procedures ethically and responsibly. In South Africa, the Labour Relations Act (LRA) is clear about the retrenchment procedure that needs to be followed by the employer.  

1. Issue a notice to your employee(s) before engaging in talks with them

Your notice needs to state your intention to retrench specific employees and provide necessary information for the employees, to prepare them for any consultations. Some of the information you need to include in the notice is:

– Why the cutback is happening

– How many employees will be affected

– Measures that were attempted to prevent retrenchment, and why they failed

– The proposed compensation package for affected employees

– Future re-employment possibilities 

– The number of employees that have been retrenched over the past year

– The expected time by which the affected employees can leave the company

2. All parties must engage in a consultation, also known as a joint consensus-seeking process

At this time, the employee has the right to raise issues around the retrenchment and, in the case that he or she disagrees with certain terms, it is required that you make suggestions with a view to reaching an agreement with that employee. During your consultation, issues such as how the selection was made, and  compensation for the affected employees, should be discussed and agreed upon.

Handling the retrenchment process differs across industries and company sizes, and therefore, it is imperative that you consult the Labour Relations Act to ensure you are conducting the process lawfully for your business. 

Keeping employees, and alternatives to retrenchment

It doesn’t have to be all doom and gloom. Considering alternatives to retrenchment may have a positive impact, not only on your employee, but on your business in the long run. Some alternatives that are worth consideration include:

Adjusting terms and conditions of employment

If you need to reduce costs – specifically labour costs – consider the feasibility of agreeing to changes in the terms and conditions of employment as an alternative to retrenchment. Since the terms and conditions of employment can only be lawfully changed with the consent of your employee, hold an open discussion with them in a calm and comfortable environment. 

Re-deploying or upskilling employees for other positions in your company

When a position becomes redundant in your business, consider alternative vacancies that these employees could fill. We discussed how businesses are battling to find the skills they need. Up-skilling your staff to meet the skills shortage that your company may be suffering from can be a rewarding exercise. Enrolling your employees in an online marketing course, for example, could be an invaluable asset for driving and building your business. 

Reduction in working hours (part-time employment)

In certain industries, a reduction in working hours may be a viable alternative to retrenchment. The premise being that the employee agrees to the reduced time, and a reduction in salary accordingly. This can be a short-term measure until business picks up again, and gives the employee the flexibility to find more part-time work to supplement income. 

At Startup School, we want small businesses to succeed, which is why we have developed practical entrepreneurship courses that help you grow your business the right way. Also, all students on our entrepreneurship course stand the chance to win prize funding to the value of R100, 000 upon successful completion. 

Want to learn more about our courses? Check out the details here.

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