The job security of employees of financially distressed companies

• Author: Loubser, M.E.
• DOI: https://doi.org/10.47348/SAMLJ/v33/i2a3
• Published date: 13 January 2022
• Date: 13 January 2022
• Citation: (2021) 33 SA Merc LJ 200
• Pages: 200-237

THE JOB SECURITY OF EMPLOYEES OF

FINANCIALLY DISTRESSED COMPANIES

MIEKA E. LOUBSER*

BAccLLB candidate, Faculty of Law, Stellenbosch University

CHRISTOPH GARBERS**

Associate Professor, Faculty of Law, Stellenbosch University

Abstract

This contribution considers the legislative regulation of the job security

(which boils down to preservation of employment) of employees in case

of financial distress of a company. It juxtaposes the legislative

regulation of four interrelated processes a company may engage in

where it finds itself in financial distress, namely a voluntary internal

restructuring (especially retrenchment), the transfer of the business or

part of the business, business rescue and winding up. The legislative

endeavour to preserve the job security of employees in all these

processes is described and analysed. The discussion shows that room

exists for companies to circumvent this protection and, to the extent

that the protection does apply, that it remains difficult for employees to

ultimately challenge the substance of decisions negatively affecting their

job security. The main protection for employees in all these processes is

procedural in nature and to be found in their rights to be informed of

and consulted prior to decisions negatively affecting them. In this

regard, business rescue is the most employee-friendly process.

Participation in this process by employees, however, requires a fine

balance as it may be self-defeating and lead to winding up and the

permanent loss of jobs.

Keywords:dismissal; operational requirements; retrenchment; transfer of a

business; business rescue; merger; insolvency; liquidation

*BAccLLB candidate, Faculty of Law, Stellenbosch University.

** BLC LLB (UP) B Com (Hons) (UNISA) LLM (US). This paper is a revised and expanded

version of a dissertation written by the f‌irst author under the supervision of the second author.

The authors would like to thank PAK le Roux and Prof Richard Stevens for their comments.

Mistakes remain our own.

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IINTRODUCTION

This article explores the job security of employees of a company in

f‌inancial distress. Job security means protection against a downward

adjustment in terms and conditions of employment as well as protection

against loss of employment. The topic is of particular importance for at

least three reasons. First, from the perspective of employees, continued

job security equates to the protection of their livelihood. Secondly, any

protection of employees runs the ever-present risk of being counterpro-

ductive in contributing to the survival of companies in the face of

f‌inancial distress. If too much protection is afforded to the employees of

the company, not only will entrepreneurs be disincentivised to enter the

market, but it may stif‌le the survival of companies facing f‌inancial

distress. Thirdly, against the backdrop of an already sluggish economy,

the COVID-19 pandemic has wreaked havoc and placed numerous

companies in f‌inancial distress and endangered the job security of many

employees. Recent statistics show, for example, that between April 2020

and October 2020, 233 business rescue proceedings were instituted in

relation to companies in f‌inancial distress, of which two have already

ended in liquidation.

1

Liquidations in South Africa increased

by 21.5 per cent for the seven-month period between January and July

2021 compared to the same period in 2020.

2

From the perspective of

employees, the prevalence of f‌inancial distress across the economy is

ref‌lected in the increase in dismissals of employees based on operational

requirements. For example, in August 2020, the Department of Employ-

ment and Labour reported that in the preceding month alone, the

Commission for Conciliation, Mediation and Arbitration (the ‘CCMA’)

received 190 large-scale retrenchment referrals and 1 307 small-scale

retrenchment referrals.

3

With the pandemic showing few signs of

abating, this trend is likely to continue into the future.

1

Companies and Intellectual Properties Commission, ‘Business Rescue Proceedings

Status Report — as at 31 October 2020’, available at http://www.cipc.co.za/f‌iles/3616/0490/

5024/Status_of_Business_Rescue_Proceedings_in_South_Africa_-_as_at_31_October_

2020_v1.0.pdf, accessed on 26 August 2021.

2

Statistics South Africa, ‘Statistical Release P0043—Statistics of liquidations and insol-

vencies, July 2021’, available at http://www.statssa.gov.za/?page_id=1856&PPN=

P0043&SCH=72854, accessed on 26 August 2021.

3

Mlamla, ‘Retrenchment referrals pour in for the CCMA’ Independent Online 12 August

2020, available at https://www.iol.co.za/capeargus/news/retrenchment-referrals-pour-in-

for-the-ccma-b7ffeeb3-feda-44ba-b64b-cf8d515d3b6a, accessed on 26 August 2021. Not

surprisingly, the pandemic has exacerbated the already high levels of unemployment in South

Africa. Unemployment in the second quarter of 2021 increased by 584 000 people to 7.8

million unemployed persons just from the levels experienced during the f‌irst quarter of 2021.

This resulted in a 1.8 per cent increase in the off‌icial unemployment rate to 34.4 per cent,

which is the highest unemployment rate ‘since the start of the QLFS (Quarterly Labour Force

Survey) in 2008’. Furthermore, 8.1 per cent of employees in South Africa lost their jobs during

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The f‌inancial distress of a company may trigger any one, or a

combination, of a variety of processes — some voluntary, some compul-

sory, some with retention of control by the company and others not, and

some more benef‌icial than others to existing employees. While a

company in f‌inancial distress often will try to raise capital or engage in

f‌inancial restructuring to ensure its survival, this article will assume —

as will in reality often be the case, that the company in question cannot

do so. This essentially leaves four (overlapping) avenues open to that

company which may be listed in ascending order of external interven-

tion and f‌inality: voluntary internal restructuring (which will often

involve a downward adjustment of the terms and conditions of employ-

ment of employees and/or a reduction of the workforce through

dismissal for operational reasons in terms of the Labour Relations Act 66

of 1995 (‘the LRA’)),

4

the sale and subsequent transfer of the business of

the company (or part thereof) to third parties, business rescue and

winding up. Of these, winding-up may be described as the most invasive,

at least in the sense that it will result in dissolution and deregistration of

the company and the complete and permanent job losses for employees.

The other processes leave room for continued survival, albeit typically

accompanied by some form of internal restructuring (inclusive of the

dismissal of employees based on the company’s operational reasons).

The purpose of this paper, then, is to ref‌lect on the job security of

employees of a company in f‌inancial distress by sequentially considering

the legislative provisions impacting on a voluntary internal restructur-

ing (Part II), the transfer of a business or a part of a business (Part III),

business rescue (Part IV), winding up (Part V), and conclusion

(Part VI).

This paper focuses on the legislative protection of employees only

(and not the common-law protection of employees) and recognises the

the f‌irst six weeks of the COVID-19 lockdown. Of those who lost their jobs, 1.4 per cent became

unemployed. Note that all unemployment data are based on the narrow def‌inition of

unemployment being workers aged 15–64 who are unemployed, but actively looking for work

and available to work or unemployed and not actively looking for work but are set to start

working at a future date. See Statistics South Africa, ‘Statistical Release P0211—Quarterly

Labour Force Survey, 2nd Quarter 2021’, available at http://www.statssa.gov.za/?page_id=

1854&PPN=P0211&SCH=72944, accessed on 26 August 2021 and Statistics South Africa,

‘Report-00–80–03—Results from Wave 2 survey on the impact of the COVID-19 pandemic

on employment and income in South Africa’, available at http://www.statssa.gov.za/?page_

id=1854&PPN=Report-00–80–03&SCH=72638, accessed on 26 August 2021.

4

Section 188 of the LRA recognises the right of an employer to dismiss based on

‘operational requirements’. In turn, s 213 def‌ines ‘operational requirements’ as the

‘economic, technological, structural or similar reasons of an employer’. In case of f‌inancial

distress, a possible dismissal will clearly be based on either, or a combination, of the

‘economic’ and ‘structural’ reasons of the employer.

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