Changing resignation to retrenchment

Employees who resign from their employment often enter into settlement negotiations with their employer following their resignation Those negotiations often take place in the CCMA or in the Labour Court, when the employee has referred a constructive dismissal claim against the employer. One of the topics that often comes up in the negotiations, is the possibility of changing resignation to retrenchment.

This is because there are tax benefits associated with retrenchment. A severance package is not subject to tax (up to a monetary limit). As a result, if the employer is paying the employee a monetary amount as part of a settlement, it is possible to reduce the employee’s tax liability by framing it as a severance payment for retrenchment.

There are also other benefits of doing this. The employee is able to claim UIF payments while unemployed if the reason for termination is retrenchment.

However, inaccurately misrepresenting the reason for termination can have serious risks and consequences. It can amount to tax evasion and fraud, which can result in criminal liability. It cal also constitute a crime in terms of the UIF Act.

Care should therefore be taken to avoid inaccurately labeling the reason for termination of employment in settlement agreements by changing resignation to retrenchment for tax or UIF reasons, so as to ensure that these significant risks are avoided.

Those risks apply to both the employer and the employee, as both of them may be prosecuted for their joint role in the misrepresentation of the reason for the termination of employment.

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