The subtle nuances of when severance pay must be paid

severance pay
29 Nov 2021

Of late, many companies have needed to restructure to ensure they are financially sound enough to continue operating. Unfortunately, very often restructuring has come with employees facing retrenchment and losing their jobs. Retrenchment packages, as per Section 41 of the Basic Conditions of Employment Act (the BCEA), are one week’s remuneration for each completed year of service with that employer.

However, what is often not considered is what happens when an employee is offered alternative employment and refuses to accept it? Are they still entitled to their severance pay for the loss of their original job?

Simply put, an employee who unreasonably refuses to accept an employer’s offer of alternative employment within the company or with any other employer is not entitled to severance pay.

Severance is not payable in certain specific instances such as, inter alia:

  1. a fixed term contract employee who is employed for less than 24 months;
  2. employees who are retired at an agreed retirement age; and
  3. as confirmed above, if a transfer of business in terms of Section 197 of the Labour Relations Act takes place and employees are transferred as a going concern on terms and conditions no less favourable, their continuity of service will not be interrupted, and these employees cannot claim a severance payment.

The Labour Appeal Court decision of Irvin and Johnson Limited vs CCMA and Others which was reported in 2006 sets out a rather curious position in the law which has as yet not been challenged.

The judgment provides a useful overview of Section 41 and explains the general exception to the rule that an employee who is retrenched is entitled to severance pay.

  • The first scenario discussed by the Court is where an employee forfeits severance where such employee unreasonably refuses alternative employment.
  • The second scenario is where the employee reasonably refuses such alternative employment and in that case the employee would be entitled to the payment of severance.
  • A third scenario is where the employer arranged alternative employment with another employer for an employee facing dismissal for operational requirements.

The facts of the Irvin vs Johnson case were that the employer elected to outsource management of its canteen and an agreement was entered into with another company to take over the operations of the canteen and its workforce. Following consultations, the offer of alternative employment was accepted and the contracts of the employees were terminated whereafter the employees started their employment with the food service company.

However, the new employer did not recognise the employees’ past years of service and a dispute was lodged where the employees claimed severance pay for their previous employment which the company refused to pay. Despite the CCMA and Labour Court determining that the company was obliged to pay severance pay, the Labour Appeal Court formulated an interpretation of Section 41 of the BCEA to the extent that the employees were not prejudiced when they accepted the offers of alternative employment with the food service company.

This meant that, even though the employees may not carry over years of service to the new employer, the employees would in fact have no legal claim to be paid severance.

What one gleans from this judgment is that Section 41(4) provides an incentive for an employer to rather find alternative employment for the employees instead of punishing them for not taking up a new opportunity. It also sets out how the Courts have interpreted the intention of the legislature and particularly Section 41 of the BCEA.

Whilst at first blush it may seem unfair to penalise employees who take up alternative employment in that they will not receive any severance, the intention is to incentivise employers to find alternative employment for their employees in circumstances where the employee is at risk of being terminated on account of operational requirements and changes.

See also:

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
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