Employers: How to Avoid Paying Severance Pay on Retrenchment

“Only in our dreams are we free; the rest of the time we need wages.” (Terry Pratchett)

Retrenching employees can be an expensive business. You’ll have to pay each employee a minimum of one week’s pay for each completed year of ongoing service, and that total liability can add up alarmingly.

A recent Labour Court ruling has however set out clear guidelines for avoiding that cost by arranging alternative employment for your retrenched employees.

A lost cleaning contract and a raft of retrenchments

A contract cleaning services company, fearing it would lose a particular contract in an upcoming tender process, warned all staff employed at the factory in question that they could face retrenchment.

Sure enough, the tender went to a competitor. The company was able to absorb 130 employees into other positions and locations, but 41 had to be retrenched. Eleven of them were given severance pay, but the employer declined to pay anything to the 30 who accepted alternative employment.

The employees were having none of that, and approached the CCMA (Commission for Conciliation, Mediation and Arbitration). The CCMA awarded them both retrenchment pay and notice pay.

The employer then took the matter to the Labour Court, which set aside those awards. So, the employer is off the hook on both counts – and employers and employees should understand the Court’s reasoning for that decision.

Having your cake, and eating it

• The BCEA (Basic Conditions of Employment Act) provides that employees cannot demand severance pay if they are offered alternative employment and unreasonably reject it. As the Labour Court here put it, “the raison d’être of [severance pay] is to compensate an employee who has been dismissed for operational requirements, through no fault of her own, to be paid compensation for her loss of employment. However, the legislature considered that an employee who unreasonably refuses an offer of alternative employment is not without blame. She should therefore shoulder the loss of employment without any compensation.” (Emphasis added)
• Equally, “where an employee accepts alternative employment, arranged by the employer, she forfeits her right to receive severance pay.” Being paid both severance pay and a salary is a double benefit not intended by the BCEA.

Employers: Two practical steps to avoid liability

Employers should take two lessons from this ruling:

1. Don’t just “sit on your hands watching the world go by”! As this Court put it, employers are incentivised to ensure that their employees get another job. Which is exactly what the cleaning company did here: it “did not just sit on [its] hands and impassively watch the world go by,” it managed to find alternative employment for 30 employees. It was extremely pro-active in this regard, meeting with the new employer, giving it all the information it needed, and allowing employees paid time off to attend interviews at a venue which it arranged.
2. Act early and urgently. This employer avoided the claim for notice pay by giving over four weeks’ notice of termination. What’s more, it engaged in the consultation process and issued notice of retrenchment circulars at the earliest opportunity, then acted “as a matter of some urgency” to collaborate with the new employer in arranging new job offers.

Another point to consider

It’s worth noting perhaps that the Court also mentioned in passing (“obiter dicta”) that even if an employee were to find her own new employment “through her own efforts and without the aid of her retrenching employer” she “needs no soft cushion of severance pay to land on” and would have to justify any such claim.

Still, on the “better safe than sorry” principle, employers should not take chances here – rather be pro-active in arranging alternative employment as soon as you can.

A final thought for employees

Before you decide to reject any offer of alternate employment bear in mind that, as this court confirmed, it will be up to you to prove your entitlement to severance and/or notice pay – it’s not automatic!

Whether you’re an employer planning to retrench staff, or an employee facing an impending retrenchment, getting the best legal advice is key.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.

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