Are the Competition Authorities the new Watchdogs of Employment?

25 November 2005

Article by Natalie Browne of Cliffe Dekker Inc

has a comprehensive web of labour legislation designed to protect employees and to afford a measure of security of tenure. The Labour Relations Act (LRA) provides, under section 197, that employees’ contracts of employment must be transferred from the seller of a business to the purchaser of that business. Mergers often result in surplus employees in the merged entity, precisely because of the operation of section 197.

Employers have a right to dismiss employees for operational reasons subject to the procedures set forth in section 189 of the LRA. Section 189 is designed to ensure that employees are not unfairly dismissed and that those that are dismissed are adequately consulted and compensated.

Dismissals for operational requirements have become highly topical in the context of competition law. The Competition Act requires the competition authorities to consider the effect of a merger on employment and the parties to a merger are obliged to complete a schedule outlining the effect that the proposed merger will have on employment. The Commission requires that the parties provide details of the ‘worst case scenario’. Having received these details, the competition authorities have increasingly been inclined to impose conditions preventing the parties from implementing their worst case scenario or ensuring that they do not exceed their worst case scenario.

In a merger earlier this year between two internet service providers, the proposed merged entity and the employees reached an agreement as part of their collective bargaining which related to the number of employees and the time period for the retrenchments resulting from the transaction. The Tribunal conditionally approved the merger subject to the terms of the agreement reached between the merging parties and the employees. The Tribunal was of the view that the agreement adequately addressed the public interest concerns arising from the merger.

In the hostile takeover bid by Harmony for Goldfields, Harmony anticipated between 1000 and 1500 retrenchments as a result of the rationalisation of production and support facilities and the flattening of management structures. The Commission accepted Harmony’s offer to give an undertaking that job losses be limited to 1500 employees in so-called ‘supervisory’ positions.

The Tribunal, however, went a step further by lowering the number of merger specific retrenchments to 1000 jobs. The Tribunal also imposed as a condition of the merger Harmony’s undertaking that the retrenchments would affect employees occupying managerial and supervisory positions as the Tribunal was of the view that these employees would be able to find new employment in the event of retrenchment as they have marketable skills.

In a further recent case, the target firm was on the brink of failure, potentially resulting in the retrenchment of 1500 employees. The proposed acquisition of the target by a larger competitor would rescue the target firm but the implementation of new technology would result in the retrenchment of a maximum of 400 employees.

The Commission recommended that the merger be approved subject to a number of conditions including a moratorium on the maximum number and categories of employees that could be retrenched. The merger parties were required to offer alternative skills training to the affected employees for a period of six months from the date of the retrenchment notice and were obliged to provide them with accommodation and two meals a day for the duration of the training. The conditions proposed by the Commission were endorsed by the Tribunal.

If parties are planning retrenchments as a result of a merger it is likely that the merged entity may face a conditional approval and a delay in the merger clearance process. Many industries have powerful trade unions that must be consulted every step of the way. Taking this into account, together with the protections afforded to all employees by the labour laws, one has to wonder whether the role the competition authorities are playing is really necessary.

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