U/S; 110033 – Process Redundancy Documents 

Understand and process source redundancy document.

What Is Redundancy?

Redundancy is one of the potentially fair reasons to dismiss an employee. It has a strict legal meaning and only applies where an employer:

• stops carrying on the business for which a particular employee was employed, either completely or in the place where the employee works;
• stops requiring employees or requires fewer employees to carry out work of a particular type, either at all or in the place where the employee works.

It is not redundancy if you want to dismiss someone on performance grounds or simply feel they are not right for the role.

Sometimes an employer will no longer require an employee’s job to be done by anyone. This is known as a redundancy. Reasons for redundancy can be the result of introduction of new technology, changes to the market (ie. lower sales or production), changing operational demands as well as the general need to increase efficiency and reduce costs of doing business.

In those circumstances, the law offers significant protection to employees exposed to the proposed changes. In most cases, the law not only requires the employer to have a valid reason for making the decision, but also requires them to follow numerous procedural steps to implement the redundancy.

A redundancy is only exempt from unfair dismissal when the redundancy is genuine.

A redundancy is genuine when:

• the employer no longer requires an employee’s job to be performed by anyone because of changes in the operational needs of the employer’s business

The redundancy is made in compliance with the terms and conditions of a Modern Award or enterprise agreement that applied to the employment to consult about the redundancy

A redundancy is not genuine in circumstances where the employer:

• hires someone else to do the same job as the employee who was dismissed
• has not properly communicated with the employee and given fair notice under the Modern Award or agreement
• has not made a reasonable effort to replace the staff member to another position in the company or explored other alternatives to redundancy

If an employer is unsure whether the redundancy is genuine or not, they should seek expert advice from a qualified practitioner or work relations specialist.

To ensure a business not only satisfies its obligations, but avoids unnecessary disputes by troublesome employees, it is recommended that a formal consultation process is undertaken, which should be documented accordingly.

An employer should not tell an employee that they have made a definitive decision until consultation has been completed.

Consultation (Initial)

Typically, consultation commences with a discussion with an employee outlining that the business is considering making that person’s job redundant. Following this discussion, the employer should invite the employee to a formal meeting to discuss the possibility of redundancy in more depth and, particularly, possibilities of re-placement and alternatives which may save the employee’s position.

It is a good idea to keep a record of any invitations to redundancy meetings and follow each meeting up with a written summary.

Consultation (Subsequent)

At the formal meeting, the employer would ideally consult regarding the redundancy process, explain how the selection will work, explore options for redeployment and alternatives to redundancy.

What amounts to a reasonable deployment depends on the facts of the case and advice should always be taken on specific circumstances.

In many cases, to properly satisfy its obligations, a business may be required to meet on more than one occasion.

Confirmation

If, subsequent to a fair process having been conducted, it is determined that the outcome will be redundancy, a final meeting should be convened. At that time, the employer should deliver a preliminary outcome.

Following confirmation of redundancy, a formal letter of redundancy should be issued to the employee.

What to Include in a Letter of Redundancy?

The information contained in a letter of notification of redundancy should:

• provide an overview of the situation generally (e.g. the reason why the redundancy is being considered)
• provide an outline of the process that has been followed (steps of consultation)
• confirm that the employer has reviewed other areas in the business and that there are no suitable vacancies or opportunities for redeployment
• confirm that there is no suitable alternative to avoid the redundancy
• clearly state that the position is being made redundant and explain the reasoning behind the decision.
• specify the last date of the employee’s employment with the company
• break down the monetary entitlements the employee will receive and specify when they can expect to receive them (i.e. annual leave, overtime, long service leave)

What process must be followed in a redundancy situation?

Try to avoid or reduce redundancies by considering alternatives like recruitment or pay freezes, bans on agency staff or contractors and changing contract terms.

Warn all potentially affected staff of the risk of redundancy at an early stage in the process. This is especially important where you need to select between employees in similar roles. Consider using an at risk of redundancy letter for this purpose.

Each affected employee must be consulted about their possible redundancy before the final decision. The meeting should be in private and with a view to reaching agreement. Consider using a Redundancy consultation letter to inform employees of the date and time of a meeting to discuss potential redundancies. This letter can be a first step in your redundancy process if you are just making one employee in a unique role redundant and there is no element of selection.

Choose staff for redundancy carefully, fairly and rationally. This can be tricky to get right so, for more information, read Redundancy pooling and selection.

Consider any suitable alternative employment that might be available within your business (or a parent company if there is one), even if additional training may be needed. Keep considering this right up until the dismissal takes effect (i.e. during the notice period, after redundancy is confirmed).

Give employees the right to appeal their selection for redundancy. Consider using a Letter inviting an employee to a redundancy appeal meeting for this purpose.

Take care to abide by all the dismissal basics relating to issues such as notice period and accrued holiday pay and remember that redundant employees have the right to time off to look for alternative employment. Consider using a professionally prepared Redundancy dismissal letter.

What else should I know about redundancy?

Employees who are dismissed on grounds of redundancy after at least two years’ service are entitled to a statutory redundancy payment according to their pay, age and length of service (capped at 20 years).

Statutory redundancy payments (SRPs) are calculated by multiplying a week’s pay (capped at a statutory limit) as follows:

• 5 week’s pay for each full year of service while they were under 22
• 1 week’s pay for each full year of service while they were 22 or older, but under 41
• 5 week’s pay for each full year of service while they were 41 or older.

Many employers choose to make enhanced redundancy payments but make sure that you do not unlawfully discriminate. The safest method is to use the structure of the statutory formula with a slight change (i.e. multiply the SRP by a factor or multiply the number of weeks’ pay by the same factor for each age group or use actual weekly pay instead of the statutory limit).

Employers often make payment of enhanced redundancy pay conditional on signature of a settlement agreement to waive any claims.

Redundancy Documents

This sub folder includes the policy, procedures and letters that will be needed if an employer is planning to dismiss some or all of their employees by reason of redundancy. Potentially, redundancy is a fair reason for dismissing an employee but only if a full and fair consultation process is carried out and the reason for the redundancy dismissal is the closure of a business or workplace or a reduced need for employees to carry out work of a particular type.

There are a range of documents in this sub folder to be used when an employer decides to offer voluntary redundancy to employees as an alternative to compulsory redundancy. There is no legal requirement for employers to offer voluntary redundancy but it is good practice to do so as it may provide a way of avoiding, or at least reducing, the need for compulsory redundancies.

Adequate time must be allowed for consultation on the redundancy plans and this will be at least:

• 30 days before the first redundancy where there are 20 to 99 proposed redundancies; and
• 45 days (reduced from 90 days as of 6 April 2013) before the first redundancy where there are 100 or more proposed redundancies.

Where there are fewer than 20 proposed redundancies, the consultation period is not specified but employers should allow at least two weeks.

Consultations should be with a view to avoiding redundancies or minimising their impact.

In any redundancy situation, employers must consult with individual employees. In addition, employers must consult with trade union or elected employee representatives if more than 20 employees are affected within a 90-day period. This is known as collective consultation.

Lay-offs and short-time working can be considered as a temporary alternative to redundancy.

• Redundancy Policy
• Redundancy Procedure And Checklist
• Redundancy Selection Matrix
• Sample Possible Redundancy Reasons
• Guidance Notes: Alternative roles for redundant employees
• Alternative Employment Offer Letter
• Alternative Employment – Successful Trial Period Letter
• Alternative Employment – Unsuccessful Trial Period Letter
• Letter Informing All Employees About a Potential Redundancy Situation
• Voluntary Redundancy Policy
• Letter Inviting Applications for Voluntary Redundancies
• Voluntary Redundancy Application Form
• Letter Advising Employees of the Outcome of their Application For Voluntary Redundancy
• Letter Advising Employee that Role is No Longer at Risk of Redundancy
• Letter Setting Out the Terms of a Voluntary Redundancy Agreement
• Voluntary Redundancy Agreement
• Redundancy Consultation Letter
• Second Redundancy Consultation Letter
• Letter Inviting Employees to Elect Representatives for Collective Redundancy Consultation
• Letter Announcing Result of Election of Representatives for Collective Redundancy Consultation
• Redundancy Individual Consultation Letter following Collective Consultation
• Notice Of Redundancy
• Notice Of Redundancy Appeal Hearing
• Redundancy Appeal Hearing Decision Letter
• Letter Withdrawing Notice of Redundancy

Document Templates for Leaving Employment

Leaving Employment, Termination, Resignation and Retirement

Simply-Docs provides a comprehensive package of professionally drafted documents, fully editable, for documenting the termination of employment.

An employee can leave your company for a variety of reasons. They may resign, retire, or you may dismiss them because of redundancy or poor performance. Whatever the circumstances, you need to make sure you follow proper procedures and, in all cases, ensure that you agree notice periods, the employee’s leaving date and arrange for a proper handover of work and the return of company property.

For senior employees, and depending on the terms of their employment contracts, you may wish to put them on a period of ‘garden leave’ and/or remind them of the terms of their restrictive covenants.

• Termination and Resignation
• Settlement Agreements
• Redundancy Documents
• Retirement Documents

Calculate redundancy pay.

Calculating weekly pay in respect of employees receiving a monthly salary is done by dividing one’s salary by 4,333. In your case you earned R 6 000 per month, which means your weekly pay was R 1 384,72 (R 6 000/ 4,333). This in turn means you should have received R 1 384,72 as your severance package and not R 1 000.

Employment law update – Severance pay and a new amendment to the BCEA

“I am a teacher who was permanently employed during 2018. I only worked a year and was retrenched due to lack of learner registration this year, so I was not allocated a class for 2019.

I was teaching preschool learners at a primary school and was earning R 6 000 monthly. My employer paid me a retrenchment package of only R 1 000. According to my employer, the law states that for each year worked, one week must be paid to me and so it is R 1 000 a week in a year.”

Answer:

I will assume you were either employed at a private school, alternatively if it was a public school, you were employed directly by the school’s governing body and you were not employed by the state under the Employment of Educators Act 76 of 1998. My assumption is underpinned by the fact that it is highly unlikely that the state as employer would embark on retrenchment proceedings. The necessity to make this distinction with regard to who your employer, directly bears on the answer to your query.

It is correct that severance pay is calculated at one week’s remuneration for each completed year of continuous service. This is in terms of s 41(2) of the Basic Conditions of Employment Act 75 of 1997 (BCEA).

Therefore, receiving one week’s pay as your severance package for one year of service, is correct. I do not, however, agree with the quantum you received. Calculating weekly pay in respect of employees receiving a monthly salary is done by dividing one’s salary by 4,333.

In your case you earned R 6 000 per month, which means your weekly pay was R 1 384,72 (R 6 000/ 4,333). This in turn means you should have received R 1 384,72 as your severance package and not R 1 000.

Before addressing what legal recourse is open to an employee who does not agree with the amount of severance pay they received, it is important to note that there is nothing preventing an employee and employer from negotiating more favourable terms for calculating severance pay. Therefore, an employee and employer can agree that severance pay will be calculated at two weeks remuneration for every completed continuous year of service.

If there is a dispute about an employee’s severance pay, then an employee can refer a severance pay dispute to either the Commission for Conciliation Mediation and Arbitration (CCMA) or to a bargaining council, which has jurisdiction.

Section 41(6) to (9) of the BCEA, gives the CCMA or bargaining council the authority to conciliate and arbitrate such disputes.

In addition to your severance pay, you should have also received payment for any outstanding leave, if any, that was accruing to you at the time of your dismissal. Having worked a year, you would have been entitled to 21 consecutive days leave, on full remuneration. This is in accordance with s 20(2)(a) of the BCEA.

If at the time of your retrenchment you had leave owing to you and this had not been paid out by the school, then in terms of s 74(3) of the BCEA, you could include your leave pay dispute, with the severance pay dispute and refer both matters to the CCMA.

Having addressed the question posed, it would be an opportune time to advise readers of the introduction of s 77A to the BCEA. In the past the only time the CCMA could hear and address a dispute regarding the non-payment of statutory money was if the employee had referred an unfair dismissal dispute or a severance pay dispute to the CCMA. When adjudicating the fairness of the dismissal or the severance pay dispute and provided certain other conditions were met (see s 74(2)(a) to (c) which has since been repealed effective 1 January 2019), the commissioner would hear any dispute regarding statutory money and if finding in favour of the employee included in their arbitration award, a finding that the employer pay to the employee such outstanding money. This meant that in the absence of challenging a dismissal or one’s entitlement to severance at the CCMA, an employee who wanted to claim overtime pay, for example, had to approach the Department of Labour for assistance.

Section 73A, as part of the 2018 amendments, now provides that any employee who earns less than the Ministerial threshold can refer a dispute to the CCMA ‘concerning the failure to pay any amount owing to that employee or worker in terms of this Act, the National Minimum Wage Act, 2018, a contract of employment, a sectoral determination or a collective agreement.’

These disputes follow the normal dispute resolution path set out in the Labour Relations Act 66 of 1995; first conciliation followed by arbitration if a certificate of non-resolution has been issued.

Retrenchments

Nobody can argue that this year was economically a very challenging year with lots of fatalities in term of job losses. Many employers decided to close shop because of the economic climate combined with the impact of the extended industrial action in the mining industry and transport sector.

Looking at the questions that are asked by employers and employees regarding retrenchments, there clearly seems to be a lack of understanding of the rights of employees in terms of section 189 / 189(a) of the Labour Relations Act as well as the Basic Conditions of Employment Act. Some employers are under the impression that retrenching an employee is as simple as issuing a notice of termination of the employment relationship based on the operational requirements of the company. Another common mistake is to selectively nominate “problem” employees for retrenchment instead of using a fair selection criterion such as the LIFO (Last In First Out) principal recommended by LRA.

For these employers there may be a nasty surprise in the near future because a retrenched employee may refer his / her dismissal to the CCMA or to the labour court if more than one employee was retrenched. Compensation of up to 12 months of the employee’s normal remuneration may be awarded for not following a fair procedure and / or retrenching for a fair reason (procedural and substantive fairness).

In order to ensure fairness towards both employer and employee, it is necessary to better understand section 189 of the Labour Relations Act.

When may an employer retrench employees?

Employers may dismiss employees based on their operational requirement as defined in section 213 of the Labour Relations Act. “Operational requirements” means requirements based on the economic, technological, structural or similar needs of an employer.

It must be remembered that the onus will be on the employer to prove that a genuine operational requirement existed. The employer cannot merely claim that for instance the company was not making money and as such had to retrench employees; the employer will have to produce evidence of such a financial crisis.

How to dismiss employees based on the operational requirements of the employer?

Section 189 of the Labour Relations Act is applicable and prescribes a joint consensus seeking process in an attempt to reach consensus on appropriate measures (section 189(2)) –

• to avoid the dismissals;
• to minimise the number of dismissals;
• to change the timing of the dismissals; and
• to mitigate the adverse effects of the dismissals;
• the method for selecting the employees to be dismissed; and
• the severance pay for dismissed employees

Who must the employer consult with (section 189(1))?

The employer must consult with one of the following parties, starting at the top of this structure moving down until the appropriate consulting party has been identified –

any person whom the employer is required to consult in terms of a collective agreement;

if there is no collective agreement that requires consultation –

• a workplace forum, if the employees likely to be affected by the proposed dismissals are employed in a workplace in respect of which there is a workplace forum; and
• any registered trade union whose members are likely to be affected by the proposed dismissals;

if there is no workplace forum in the workplace in which the employees likely to be affected by the proposed dismissals are employed, any registered trade union whose members are likely to be affected by the proposed dismissals; or

if there is no such trade union, the employees likely to be affected by the proposed dismissals or their representatives nominated for that purpose.

What information must be disclosed to affected employees (section 189(3))?

The employer must issue a written notice inviting the other consulting party to consult with it and disclose in writing all relevant information, including, but not limited to-

• the reasons for the proposed dismissals;
• the alternatives that the employer considered before proposing the dismissals, and the reasons for rejecting each of those alternatives;
• the number of employees likely to be affected and the job categories in which they are employed;
• the proposed method for selecting which employees to dismiss;
• the time when, or the period during which, the dismissals are likely to take effect;
• the severance pay proposed;
• any assistance that the employer proposes to offer to the employees likely to be dismissed;
• the possibility of the future re-employment of the employees who are dismissed;
• the number of employees employed by the employer; and
• the number of employees that the employer has dismissed for reasons based on its operation requirements in the preceding 12 months.

The employer must allow the other consulting party an opportunity during consultation to make representations about any matter dealt with above, as well as any other matter relating to the proposed dismissals. The employer must consider and respond to the representations made by the other consulting party and, if the employer does not agree with them, the employer must state the reasons for disagreeing. If any representation is made in writing, the employer must respond in writing.

How long does this process take?

The duration of the joint consensus seeking process entirely depends on the circumstances such as the reason for the contemplated dismissals, the complexity of the information disclosed and the number of employees affected. Normally on average such a process takes between two and three weeks.

We employee more than 50 employees and contemplate dismissing at least 10 employees based on the company’s operational requirements.

In such instances the employer will have to follow the steps outlined in section 189A of the Labour Relations Act. For the purpose of this article I am not going to discuss section 189 A. The most important points to remember are that:

• Timeframes are prescribed. The employer may effectively not take a decision to dismiss during the first 30 days, or give notice of termination of employment before 60 days lapsed.
• Employees have the right to strike or to refer the matter to the Labour Court once notice has been given by the employer.

How do I select employees to be retrenched?

Selection criteria that are generally accepted to be fair include length of service, skills and qualifications. Generally, the test for fair and objective criteria will be satisfied by the use of the “last in first out” (LIFO) principle. There may be instances where the LIFO principle or other criteria needs to be adapted. The LIFO principle for example should not operate so as to undermine an agreed affirmative action programme. Exceptions may also include the retention of employees based on criteria mentioned above which are fundamental to the successful operation of the business. These exceptions should however be treated with caution.

What alternatives to a dismissal may be raised by affected employees?

Again, this entirely depends on the circumstances. These are some suggestion that may be made by affected employees in order to save or make more money instead of having to retrench them. The employer must consider these suggestions and communicate back to the affected employees the reasons for rejecting the suggestions. The most common mistake made by employers is to not consider alternatives suggested by the affected employees. It must be remembered that the primary purpose of the joint consensus seeking process is to avoid dismissals and the employer must as such be open to workable alternatives. The dismissal of an employee could be found to be substantively unfair if a reasonable and workable suggestion as alternative to a dismissal was made but the employer outright rejected such a suggestion without justification.

• measures to increase productivity
• short time
• rationalizing costs and expenditure
• increase or decrease in shifts and length of shifts
• decreasing the number of contractors or casual labourers
• using employees to perform the functions performed by contractors or casual labourers
• outsourcing a function to its own staff after the employees have formed themselves into a company
• skills development to enable employees to move into different positions
• stopping overtime or Sunday work
• reducing wages (by agreement)
• early retirement offers or schemes
• moratoriums on hiring new employees
• gradual reduction of workforce by way of natural turnover
• extended unpaid leave or temporary lay-off

How much severance pay?

Employees are entitled to 1 week’s severance pay for each completed and continuous year of service with the same employer. The employer does not have to pay severance pay if an employee unreasonably refuses to accept an offer of employment with the current employer or another employer (sections 41(2), 41(4) of the Basic Conditions of Employment Act).

It must be remembered that severance pay for employees that fall under the scope of a bargaining council such as the MEIBC or MIBCO may be different to the minimum prescribed by the BCEA.

How is severance pay calculated?

According to the determination issued by the Minister of Labour in Government Notice 691 of 2003 the following payments are included in an employee’s remuneration for the purpose of calculating severance pay:

• housing or accommodation allowance or subsidy; or housing or accommodation received as a benefit in kind. Any housing or accommodation allowance or subsidy paid in cash, or the value thereof if paid in kind, is deemed to be part of remuneration.
• car allowance or the value of provision of a company car. This does not apply in those instances where the employer provides a vehicle to the employee so as to allow the employee to travel to and from work, with no other private usage of the vehicle by the employee.
• any cash payments made to an employee, except those listed as exclusions in 2 below.
• employer’s contributions to medical aid, pension, provident or similar funds or schemes, must be considered as part of the employee’s remuneration and must be included when making calculations in terms of this notice.
• employer’s contributions to funeral or death benefit schemes also form part of remuneration and must be included in the calculation of remuneration.

The following items do not form part of the employee’s remuneration for the purpose of these calculations:

• any cash payment or payment in kind that is provided in order to enable the employee to work (for example, equipment, tools or a similar allowance, or the provision of transport or the payment of a transport allowance to enable the employee to travel to and from work only.
• a relocation allowances
• gratuities, for example tips received from customers, and gifts received from the employer.
• share incentive schemes.
• discretionary payments not related to the employee’s hours of work or performance, for example a discretionary profit-sharing scheme.
• an entertainment allowances
• an education or schooling allowance.

The value of payments in kind must be determined as follows.

• a value agreed to in either a contract of employment or collective agreement, provided that the agreed value may not be less than the cost to the employer of providing the payment in kind; or
• the cost to the employer of providing the payment in kind.
• (Employers who provide accommodation to the employees, or any other benefits in kind, are advised to enter into a written agreement with the employee regarding the value of the accommodation or other benefits provided in kind.)

An employee is not entitled to a payment or the cash value of a payment in kind as part of remuneration if:

• the employee received the payment or enjoyed, or was entitled to enjoy, the payment in kind during the relevant period.
• in the case of a contribution to a fund or scheme that forms part of the remuneration, the employer paid a contribution in respect of the relevant period.

If the payment fluctuates, it must be calculated over a period of 13 weeks or if the employee has been in employment for shorter period, over that period.

A payment received in a particular period in respect of a longer period (e.g. a 13th cheque) must be calculated pro rata.

This schedule applies only to the minimum payments that an employer is required to make in terms of the Basic Conditions of Employment Act, 1977.

It should be noted that where the employee’s remuneration fluctuates regularly, the calculation of payment for annual leave must be based on the employee’s average earnings for the previous 13 weeks. The average will of course, include commission and or overtime paid for.

Tax implications

Where, on dismissal or retrenchment, an employee is entitled to an amount which refers to the period that the employer is obliged to give the employee notice of such termination of service, in other words, the employer pays the employee an amount equal to the salary the employee would have earned if such employee had worked for the full notice period, the amount (notice pay) will not qualify for the exemption in terms of Sections 7A(4A) or 10(1)(x) of the Income Tax Act.

Any amount in cash or in kind, received by or accrued to an employee or the holder of any office by way of bonus, gratuity or compensation (including payment for accumulated leave and redundancy payment) because of the termination of his / her services is exempt from tax to the extent of a cumulative amount of R30 000 provided that the termination or impending termination of such person’s services is due to superannuation, ill-health or other infirmity or the termination of the person’s services is as a result of the employer having ceased trading or where he / she has affected a general reduction in personnel or a reduction in personnel of a particular class.

Questions asked by some of our subscribers:

1. We have been given a “voluntary retrenchment” agreement for those of us that would prefer to take advantage of the retrenchment package that is offered if we sign such a letter. I would like to know if one can still draw unemployment if we sign.
2. Yes as long as the employee can prove that the employer initiated the voluntary offer.
3. Must I be given notice of termination of employment and must such notice be paid?
4. Yes, retrenchments are “no fault” dismissals. It is not the fault of the employee that the company cannot afford the salary of the employee anymore and as such notice periods agreed upon must be honoured. The employer may ask the employee not to return to work but must then pay the notice period.

What is retrenchment?

For an answer to the question ‘what is retrenchment’, you need to look at Section 189 of the Labour Relations Act (LRA). The LRA permits employers to dismiss employees for operational requirements. This is the process of an employer dismissing one or more of its workforces due to underlying operational activities, which are negatively affecting the viability of the business.

What is the retrenchment process in South Africa?

The employer needs to comply with a stringent set of requirements when deciding to begin the retrenchment process in South Africa. Below are some of the key information your employer will need to provide you with:

• The employer needs to issue a notice of retrenchment to all affected employees
• Reasons for the dismissal as well as what alternatives the employer considered before implementing dismissals
• The method the employer used to select which employees are to be dismissed
• Possibility of future re-employment should things improve
• Minimise your financial worries by knowing your rights. Get sound retrenchment financial planning advice to grow your retirement capital, rather than give a large portion of it away to the taxman.

What payments can you expect as retrenchment benefits?

• Severance pay – this should be at least one week’s remuneration per completed year of service. Remuneration is calculated including basic salary and payments in kind.
• Outstanding leave must be paid out in full.
• Notice pay may vary depending on your employment contract.

In the absence of a contract, you are entitled to notice pay as follows:

• If you have been employed for 1-4 weeks: 1 weeks’ notice pay
• If you have been employed for 4 weeks-1 year: 2 weeks’ notice pay
• If you have been employed for more than a year: 4 weeks’ notice pay
• Depending on your employment contract again, you may be entitled to a pro rata payment of your annual bonus and the balance of any pension or provident fund benefits.

Tax issues for retrenchment benefits

In South Africa, the taxman now uses the retirement tax tables for severance benefits, which are taxed (in aggregate for your lifetime) as follows:

Therefore, if you have previously received severance pay, or cashed in a pension or provident fund, or received a cash lump sum from a retirement fund these will be aggregated when determining the relevant tax bracket for your current severance package pay out. The timeline of these lump sums is extremely important as they impact on the tax table above. It is, therefore, critical to seek financial planning advice to assist you with the severance pay calculation.

How to reduce tax on retrenchment benefits

Lump it all together

If there is an option with regard to structuring your retrenchment package, please note that up-front lump sum payments may offer preferential tax relief. You should consult a professional adviser to review the options.

Top up for retirement

Using a portion of your severance benefit towards a retirement fund could potentially save you some income tax. Your financial planner will be able to assist you with this calculation. 

Guard the retirement portion of your retrenchment benefits

You have three possible options with your pension or provident fund pay-out.

1. Spend it

This is the worst possible option. Firstly, you will make a large, ‘voluntary’ contribution to the taxman’s coffers and secondly, in all likelihood you will never build the capital up again.

2. Invest via a retirement annuity

With this option, you cannot withdraw any of the capital until you reach the age of 55. This has the advantage of locking in your retirement savings and you pay no tax on the transfer

3. Invest via a preservation fund

This is similar to a retirement annuity, but such a fund allows a single withdrawal of up to 100% of the amount before the age of 55. Again, you pay no tax on the transfer.

What else can you negotiate in respect of retrenchment benefits?

Find out about your medical aid membership and group life cover. Can you take it over in your personal capacity until you find new employment? As you get older, effective, cost-effective medical and life insurance cover can be difficult to get again, so it is worth sticking with existing policies if at all possible.

Retrenchment benefits

Severance, notice and leave pay are specified in terms of South African labour law, along with the basis of their calculation.  Bonuses and pension benefits payments are subject to your employment contract.

To avoid paying unnecessary tax on your retrenchment benefits, structure your package according to the guidelines above. In addition, have your accrued pension savings them transferred directly into a retirement annuity or preservation fund.

Negotiate to maintain any medical aid or life insurance contracts if possible, to lock in favourable premiums.

Communicate, and disperse redundancy documents.

How do you communicate with redundancy?

Delivering news about organisational change and redundancies is never easy. But how the process is managed can have a long-lasting impact on individuals and the organisation as a whole.

So, if you’ve got to break the news to staff, it’s vital you communicate well. Here are some tips for how best to talk to your team, sustain performance and keep staff motivated.

1. Develop a clear communication strategy

Have a clear and consistent message based on the business rationale for change. In a difficult situation, you might feel under pressure to move away from the corporate line to sound less formal, but it’s crucial to stick to the leadership message as consistency is key.

2. Keep it simple

People need clarity and understanding about what the current situation is, how it affects them and what the next steps are. Be concise and stick to the facts – wordy and complicated messages will only confuse employees and create more upheaval.

3. Prepare and practice

If you’re giving a speech to your staff, prepare a script and practise delivering it. Take time to become confident and comfortable with the words – you need to understand the business concept and the rationale behind the change. Be prepared to answer questions, such as “why me?” and “how will I tell my family?”. You also need to recognise that people respond differently to change, so prepare for various scenarios.

4. Listen

Delivering bad news can be stressful. When they’re trying to stay in control, people often speak too much and don’t listen enough. This is usually due to nerves, so practising what you want to say can really help here. Developing listening skills is also crucial to demonstrate high levels of respect for the individuals affected by redundancy, as well as their colleagues still in the organisation.

5. Timing is critical

Let the people who are being made redundant know before the rest of the world. Make sure your internal and external communications are joined up. Employees won’t be happy if they find out about job losses before you’ve taken time to talk to and inform them.

6. Be compassionate

Some people think they can’t be compassionate because they have to remain professional. But telling somebody that they’re about to lose their job always demands compassion. Look at the situation from the other person’s perspective and respect how difficult it might be for them, especially if they have been with the organisation for a number of years.

7. Be visible and supportive

A lot of managers deliver bad news and then shy away. But it’s important to keep your door open and make yourself available if people have questions and grievances. Listen to their concerns and don’t be afraid to admit that you don’t have an immediate answer. Saying, “I don’t know but I will find out for you as soon as possible” is better than making employees feel they can’t approach you.

8. Don’t raise hopes about outcomes

You need to deliver the news with empathy, but avoid sharing your opinion or raising peoples’ hopes. If you can’t promise positive news, don’t. Rather, focus on the steps that you will take to help with the transition.

9. Signpost individuals to resources that can help them

The support networks for people who are being made redundant depend on their individual situations. Your HR team is often the first port of call, and some organisations also offer professional outplacement support for those affected by redundancy. People could also contact charities, unions and other independent organisations for advice, or to help them deal with stress and financial problems. Knowing that there is help available, and how to access it, can make all the difference.

10. Manage yourself through the change

As a manager, you also need to build your own resilience to cope with stress, deal with all scenarios with care and manage your own feelings about the loss of your colleagues and friends. Don’t be afraid to ask your company for additional support. Again, the support resources available to managers depend on the situation. In the first instance, managers should contact their HR team for guidance, or ask their company or professional network for additional support.

What should be included in a redundancy letter?

You should include in the letter:

• their notice periods.
• leaving date.
• how much redundancy pay they’re due.
• how you calculated the redundancy pay.
• any other pay you owe them (for example holiday pay)
• when and how you’ll pay them.
• how they can appeal.

What is retrenchment?

Retrenchment is a form of dismissal due to no fault of the employee; it is a process whereby the employer reviews its business needs in order to increase profits or limit losses, which leads to reducing its employees.

The employer must give fair reasons for making the decision to retrench and follow a fair procedure when making such a decision or the retrenchment may be considered unfair.

When my employees be retrenched?

An employer may retrench employees for “operational requirements”.

Operational requirements are requirements based on the economic, technological, structural or similar needs of an employer, in other words, the “business needs” of the employer:

An example of economic needs would include a drop in sales or services of the employer, or closure of business.

An example of technological needs would include new technology developed that can replace some employees.

An example of structural needs would include restructuring the business.

When the court has to decide whether or not the employer’s decision to retrench was fair, it looks at:

• whether there was a real reason; and
• whether it was unavoidable. This means that retrenchments must be considered as a last resort.

What is considered to be a fair procedure for retrenchment?

The employer must consult with the employees who are likely to be affected by the retrenchment, or their workplace forum, registered trade union or elected representatives, or any person elected in terms of a collective agreement (“consulting employees”).

The employer must issue a written notice inviting the consulting employees to consult and disclosing all the necessary information for such consultation.

The employer and consulting employees must engage in a consensus-seeking process on certain matters contained in the notice.

The employer must allow the consulting employees to make representations about the matters contained in the notice and other matters relating to the proposed retrenchment.

The employer must respond to the consulting employees’ representations. If the employer disagrees with the consulting employees, it must state the reasons for disagreeing with them.

The employer must select the employees to be dismissed based on a selection criteria agreed with the consulting employees or a selection criteria that is fair and objective.

After the consultation process has been exhausted, the employer may make its decision to retrench, and then issue a notice of retrenchment to the affected employees.

The law provides for additional procedures that the employer, employing more than 50 employees, must follow when deciding to retrench.

What must the notice to consult look like?

The employer must give notice to the affected employees of the need for the proposed retrenchment.

This notice must be in writing and contain the necessary information for the consulting employees to make representations at the consultation.

The necessary information includes, but is not limited to:

• the reasons for the proposed retrenchment;
• options considered by the employer to avoid the proposed retrenchment and the reasons for rejecting these options;
• the number of employees likely to be affected and their positions;
• the proposed selection criteria for selecting employees for retrenchment;
• the time when the retrenchment is likely to take effect;
• the proposed severance pays;
• any assistance that the employer proposes to offer the employees who are retrenched;
• the possibility of future employment of the employees who may be retrenched;
• the number of employees of the employer; and/or
• the number of employees that have been retrenched for the last 12 months.

If the information on the notice is not sufficient, the consulting employees may request the employer to disclose more information. For example, the employees may request the employer’s audited financial statements, where the reason for the proposed retrenchment is for cutting costs.

What does it mean to consult?

Consultation is a joint consensus-seeking process between the employer and the consulting employees. This means that the consulting employees have to come up with suggestions in respect of the proposed retrenchments and the employer has to respond.

During the consultation there are certain matters that must be discussed, such as:

suggestions to:

• avoid retrenchment, for example, no new appointments, early retirements, voluntary retrenchment, adjusting work hours or no overtime;
• decrease the number of employees to be retrenched;
• change the timing of the retrenchment, for example, the time needed to understand the information, make representations, and contribute in a meaningful way;
• mitigate effects of retrenchment, for example, when the employer decides to retrench the employees, the employer may provide time off to attend interviews, training, or issuance of reference letters;
• the selection criteria of which employees are to be retrenched, for example, the principle of “last in, first out” (“LIFO”), length of service, skills, qualifications and/or experience can be used;
• severance pay for the retrenched employees. Employers are required by law to pay 1 week’s pay for each completed year of continued employment as severance pay, however, the consulting employees may suggest a bigger amount.

What payments must be made to a retrenched employee?

Severance pay – a retrenched employee must at least be paid 1 week’s pay for each completed year of ongoing service. However, the employer must pay the retrenched employee the amount specified in any policy or his/her employment contract, if that amount is larger. If an employee refuses alternative employment with the employer or other employer, s/he will not be entitled to severance pay.

• Leave – an amount of money equal to the annual leave, or time off, that has not yet been taken by the employee must be paid out.
• Notice pay instead of working the employee’s notice period –
• if the employee was employed for less than 6 months, s/he must be paid 1 weeks’ notice pay;
• if the employee was employed for more than 6 months but less than 1 year, s/he must be paid 2 weeks’ notice pay;
• if the employee was employed for more than 1 year, s/he must be paid 4 weeks’ notice pay.
• Other pay – depending on the employment contract this would be any pro-rata payment of a bonus, pension and so on.
• Once an employee is retrenched, s/he is entitled to claim unemployment benefits (“UIF”).

What remedy does an employee have if s/he has been unfairly retrenched?

• An employee that feels s/he has been unfairly retrenched may refer his/her dispute to the Commission for Conciliation, Mediation and Arbitration (“CCMA”) or a bargaining council.
• The employee must refer a dispute to the CCMA or bargaining council within 30 days from date of retrenchment.
• If the dispute is not resolved at conciliation, the employee may refer the dispute to the Labour Court.

An employee may claim that the employer:

• reinstates him/her (with or without back pay);
• re-employs him/her, either in the work in which s/he was employed before the retrenchment or in another reasonably suitable work (without back pay); or
• pays compensation to him/her.
• The claim made by the employee must be practically possible. For example, the employee cannot claim for reinstatement or re-employment if the business closed.
• The Commissioner will decide to either dismiss the employee’s claim or grant it in full or partly.

There is a limit on the compensation that may be given to the employee, being a maximum of 12 months, depending on the circumstances. 

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