An employer and employee may enter into an agreement to terminate the employee's contract of employment. In the retrenchment context, parties often refer to this as "voluntary retrenchment". Terminating a contract by mutual consent is a concept that originates from a common law principle that allows parties to freely enter into and end contractual relationships.

Inherent in an agreement to terminate a contract is the element of consensus. Such mutual agreement is generally reached where an offer is made and acceptance of the offer is communicated to the offeror. Upon the communication of the acceptance, the agreement becomes binding on the parties.  This too is so in respect of agreeing to terminate the employment relationship.

An offer to terminate the employment relationship can be made by either the employer or the employee. However, as was seen in the recent case of RP Logistix (Pty) Ltd v Transport and Allied Workers Union of South Africa (TAWUSA) and Others (JA48/14) [2016] ZALAC 7 (4 March 2016), an offer must be made with the serious intention of becoming binding upon acceptance and both parties must believe this to be so.

Obtaining consensus

The RP Logistix case demonstrates that "consensus" is a subjective concept.

In this case, the employer had relocated to new business premises approximately 30 kilometres away from its previous operations. As a result, the employees would have to travel longer distances to work. To ease the increased cost of transport, the trade union, TAWUSA, proposed that the employer pay its members a travel allowance. Alternatively, it suggested that its members be retrenched so as to allow them to seek employment closer to where they reside.

The employer accepted TAWUSA's offer of voluntary retrenchment and communicated such acceptance to the union. However, upon the employer's acceptance of TAWUSA's proposal, the union sought to withdraw its "offer". The employer refused to accept such withdrawal on the basis that it had accepted the offer and its letter of acceptance entitled it to finalise retrenchments, which it had duly done.

TAWUSA approached the Labour Court seeking an order for reinstatement of its members whose employment had been terminated as a result of the alleged mutual agreement. The union submitted  that there was no such mutual agreement and that its members had in fact been dismissed. The employer opposed the application on the basis that it had understood TAWUSA's proposal to be an offer to terminate its members' contracts and upon acceptance (and communication thereof) the parties agreed to terminate the employment relationship by mutual consent.

The Labour Court agreed with TAWUSA that an agreement to terminate the members' employment had not come into effect.  Accordingly, the Court found that the members had been unfairly dismissed.

On appeal, the Labour Appeal Court upheld the Labour Court's finding. The Labour Appeal Court concluded that the union's "offer" could merely be categorised as a "posturing" exercise within the negotiations. In presenting its evidence, the employer had admitted that it had been surprised and was in disbelief that the employees would propose voluntary retrenchment. Once the employer had accepted the offer, it conceded that it had been its expectation that the union would reject its acceptance. This, according to the Court, illustrated that the employer had not understood the union's proposal to be a true offer, capable of acceptance.

On coming to the conclusion that no agreement had come into being and that the members had been dismissed, the Labour Appeal Court had to determine the fairness of the dismissal.  In doing so, the Court found that the employer was barred from retrospectively raising its operational requirements in justifying the reason for the resultant forced retrenchment. As a result, the Labour Appeal Court found that the dismissal was substantively unfair.  

What does this mean?

There are two key messages from the RP Logistix case -

  • Firstly, when voluntary retrenchment is proposed by an employee, an employer must ensure that the offer is indeed genuine and complete so as to become binding upon communication of its acceptance; and
  • Secondly, should an agreement to terminate the relationship not come into being due to a lack of consensus, an employer, who might have thought that there was consensus, will be precluded from raising its operational requirements in hindsight to justify the fairness of the dismissal.  

To minimise any potential conflicts on whether consensus has been reached, employers should ensure that the parties enter into a written agreement when terminating the employment relationship by mutual consent. In the absence of extrinsic evidence, the court will consider the written agreement as reflecting the parties' true intentions.

To further minimise risk, an employer should raise voluntary retrenchment during the consultation process as an alternative to retrenchment. By raising voluntary retrenchment at this stage, the employer reduces the risk of -

  • the retrenchment being procedurally unfair, where the Court finds that, in raising the voluntary retrenchment, the employer had already contemplated retrenchment and should have initiated the process stipulated in section 189 of the Labour Relations Act, 66 of 1995; and
  • being precluded from raising its operational requirements where the Court finds that no agreement has been reached to terminate the relationship and that a dismissal has in fact occurred. Where the employer has already commenced the retrenchment process, the Court is more likely to accept that there are genuine operational requirements on which the employer may rely.