Severance pay – What makes you think that you are entitled to it?

26 Oct 2022

Employees may be offered severance pay if they are dismissed for reasons based on an employer’s operational requirements. Section 41(1) of the Basic Conditions of the Employment Act of 1997 (the Act) provides that a retrenched employee is entitled to severance pay at least one week’s remuneration for every year of completed service with the employer. In addition, section 41(2) of the Act provides for the obligation to pay severance pay.

When are you entitled to severance pay?

An employee who has been employed continuously for one year by the same employer and has been dismissed is entitled to severance pay. Severance pay is offered to employees who have been dismissed for operational requirements, for example, economic, technological, structural or similar needs of an employer. The severance package will depend on how long the employee was employed for.

When an employee’s service is terminated, the employer must comply with section 41 of the Act, which states the following:

1. An employer must pay an employee who is dismissed for reasons based on operational requirements or whose contract of employment terminates or is terminated in term of section 38 of the Insolvency Act, severance pay equal to at least one (1) week remuneration for each completed continuous year of service to the employer, as calculated in terms of section 35 of the Act.
2. An employee will only be entitled to severance pay once retrenchment has been concluded. The Bargaining Council and Main Agreements to the Council will stipulate the severance package payable if the employee is a member of a Bargaining Council.

If, during the retrenchment consultation process, the parties agree to a severance package which is more favourable than the minimum package as per the Act, the agreement will replace the statutory minimum.

What is the limitation on the right to severance pay?

There are a few limitations on the right to severance pay, which is not limited to the following:

1. When there is a break in the employee’s service (more than 12 months), the employee will not be entitled to severance pay for the years exceeding the break in service;
2. If the employee worked on a fixed-term contract for less than two years, the employee will not be entitled to severance pay. The employer will be liable for one week’s salary for each continuous year of service where the contract exceeded two years;
3. An employee will not be entitled to severance pay for the period that he/she worked as an independent contractor for the employer; and
4. When an employee reaches the age of retirement, he/she will not be entitled to severance pay if requested to retire at that age. The employee is not entitled to severance pay should he/she be allowed to work beyond the retirement age.

Therefore, it is on the employer to prove that one of the above-mentioned limitations exists to be absolved from the liability to pay an employee severance pay.

Conclusion

The South African labour law specifies that severance, notice and leave pay should be calculated when paying a severance package. Subject to the employment contract, bonuses and pension benefits will also be part of the severance package.

Contact an attorney at SchoemanLaw Inc for your labour needs by visiting our website at www.schoemanlaw.co.za.

See also:

• The subtle nuances of when severance pay must be paid
• Quantifying compensation for unfair dismissal
• Withdrawal of an offer of employment – Is that a dismissal?
• National Minimum Wage under the spotlight

(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.)