Calculation of severance pay

When an employee is retrenched, the employee becomes entitled to be paid severance pay. The calculation of severance pay, according to the Basic Conditions of Employment Act, is one week’s remuneration per completed year of service (at a minimum).

However, there are exceptions to this.

Where the employer has a policy or an agreement which provides for a higher calculation rate (for example, two weeks per completed year of service), the employer must comply with that policy. The employer can also not grant certain employees one week per completed year of service, and grant other employees two weeks per completed year of service.

Where the employer has, in the retrenchment consultation process, offered an employee an alternative position (which would, if accepted, avoid dismissal) and if the employee refuses to accept that offer, they lose their entitlement to severance pay.

In addition, in undertaking the severance pay calculation, the employee’s period of service with his or her previous employer should be taken into account if the employee transferred, through section 197 of the Labour Relations Act, from the previous employer to the current employer. That section pertains to transfers of a business as a going concern,  and it provides for employees to automatically transfer from the old employer to the new employer.

There is also a beneficial tax regime which applies to severance pay. SARS does not tax severance pay (up to a specified monetary limit), provided that the employee has not previously used the severance pay tax benefit. In other words, it is a once-off benefit available to employees. It is aimed at ensuring that employees, who are losing their jobs due to no fault of their own (i.e. due to the employer’s operational requirements), are able to retain their severance packages and have a “buffer” during their unemployment until they are able to secure another job.