This is a complete guide to Retrenchment in South Africa.
In this guide you will learn:
- What is the proper procedure to retrench employees under South African Law
- What documents are required for the retrenchment process
- How a retrenchment package is supposed to be calculated by law
- Lots more
Let’s get started.
Introduction:
Hello and welcome. My name is Aslam Moolla and I am a registered Attorney at the National Legal Practice Council (Registration number 65753).
My team and I organised this guide to help you understand the CCMA process for Unfair Dismissal.
The practical steps are as follows:
- Go through the guide.
- After going through the guide – select which steps you will start on immediately.
- If there are forms to fill in – fill them in.
At the end of this process, we hope that you will be feeling more confident about where to get help. If you still require assistance on what to do, please reach out to us, and we will help you as much as we can.
Here is what’s to come:
Contents
Chapter 1 – what is the legal position on retrenchments
Chapter 2 – how should an employer retrench (the proper procedure) and what documents are required for the retrenchment process (with retrenchment letter)
Chapter 3 – How is a retrenchment package calculated
Chapter 4 – Advanced tips for retrenchments in South Africa
Chapter 1:
what does the law say on retrenchments
Section 189 of the Labour Relations Act allows employers to retrench employees.
However there are strict requirements that the employer has to follow before retrenching an employee.
Before we get into the requirements that need to be followed, lets take a look at the 3 reasons that an employer can use to retrench.
There are only 3 reasons why an employer can retrench employees. The employer must choose any one or more of the 3 reasons. This is called retrenchment based on operational requirements.
Basically that means that the employer has to retrench employees to continue operating his business.
The 3 reasons are:
1. for economic reasons;
2. for technological reasons; and
3. for structural reasons.
The employer cannot retrench for any other reason except the above.
Economic reasons are those that relate to the financial aspects of a business. In other words, the business can simply afford to keep the employee on the payroll. This could be because of poor economic conditions or because of a loss of key customers.
Employers are allowed to retrench employees because their business is doing bad financially. And the retrenchment will help keep the business survive.
Economic reasons are the most common form or reason used by employers.
However, employers must be able to prove their financial statements to prove that the business is really going through financial strain and that retrenchment was a necessity.
Technological reasons means when new technology is used at work which either makes existing jobs redundant or requires employees to adapt to the technology.
For example, a machine is bought by the employer which now does the work of the employee. Therefore the employee has to be retrenched because the machine is now doing that particular work.
Structural reasons relate to the redundancy of posts because of a restructuring of a business.
For example two people are doing the same job and the business only requires one person to do that job. Therefore the other person will get retrenched. Because it will be unfair to the business to keep two people doing one person’s job.
To recap: there 3 reasons for retrenchment:
1. for economic reasons;
2. for technological reasons; and
3. for structural reasons.
The employer cannot retrench for any other reason except the above.
Action step:
In your situation, what reason are you retrenching employees for?
Is it either economical? Or technological or structural?
Let’s continue to the next chapter which talks about: what are the requirements that need to be followed for a proper retrenchment in South African law.
Chapter 2 – how should an employer retrench (the proper procedure) and what documents are required
For employers, please read below the step by guide on the retrenchment process:
Section 189 (1) of the LRA provides that, before retrenching, employers must consult individually with all employees that could be affected by the retrenchment.
If the employee that is going to be retrenched is a member of the union, the Union must also be consulted.
Which employees to select for retrenchment?
Generally most employers use the LIFO (last in first out) principle.
However, employers have to be cautious because simply following this criteria as it may not be in the best interests of the business, both from a financial and human resources perspective.
The Labour Relations Act provides that employers can retrench on criteria that have been agreed upon or, alternatively, criteria that are fair and objective.
Being objective there are many factors within the selection of who to dismiss that can be measured against
These include:
- length of service,
- skills and experience,
- attendance records or
- efficiency in performing the job.
Important: As the employer, make sure that your criteria is not discriminatory or contrary to an entrenched constitutional right. For example, your criterial results in all females only being retrenched.
Retrenchment based on such criteria would be considered an automatic unfair dismissal, which would have serious legal repercussions for the company.
The safest route to take is careful discussion of dismissal criteria during consultations, and that employees understand.
Action steps for the employer:
- Make a list of employees that you intend retrenching.
If it’s more than 50 employers, please consult a labour lawyer because the requirements are stricter. Click here for help.
- In terms of what to discuss, we will inform you below in the next point. For now simply note who the employees are, and diarise that you need to have an individual consultation with each one of them that is being retrenched.
- If there is a Union, you have you invite a representative of the Union on each individual consultation.
STEP 1: SEND A WRITTEN NOTICE OF ANTICIPATED RETRENCHMENT
Before scheduling a consultation with the employees, you need to send them a written notice advising them that you anticipate a possible retrenchment.
The written notice should look like this:
STEP 2: MEET WITH THE EMPLOYEES WHO ARE FACING RETRENCHMENT
Now that you have your list of employees that you intend retrenching and know that you need to meet them individually
This section stipulates what you need to discuss when you are in a meeting with them
Action Steps:
At the meeting, please discuss the items below.
Remember to make detailed written notes on the date and time and the responses:
- Explain the reason for the retrenchment and discuss why you are considering it.
- Explain the steps that you took to minimize the retrenchment
- Meaning what you have done to avoid retrenchment in the first place and that now this is a last resort for your business.
- Did you try placing the employees on short time?
- Did you decrease the salaries to save jobs?
- Did you reduce overheads?
- Ask the employee if they have any proposals to avoid the proposed retrenchment.
- Make a detailed note of their responses.
- Explore any appropriate measures to mitigate the effects of retrenchment
- Meaning what can you offer to the employees to make it easier for them during this difficult period?
- For example this could include Letters of Recommendation, Certificates of Good Standing.
- Explain your method for selecting the employees to be retrenched
- Meaning how did you select which employees where to be retrenched and which to stay. This has to be fair.
- What Severance Pay will you pay to the employees who are retrenched?
- The Law requires at least one week’s pay for every completed year of service that they have done with you.
- For example, John is your employee who earns R4000 a month. We take the salary and divide it by 4 to get the weekly salary (i.e 4 weeks in a month). Therefore John’s weekly salary is R1000 (i.e R4000 / 4 weeks).
- Since John worked for 3 years, his severance pay would be R3000 (R1000 x 3 years that he worked for you).
- Discuss the Severance Pay you will be paying.
- The Possibility of any future re-employment.
- Get all parties to sign the minutes of the meeting.
STEP 3: SERIOUSLY CONSIDER THE PROPOSALS MADE BY THE EMPLOYEE
After allowing the employee to make proposals at the meeting, now spend time considering the options.
If retrenchment can realistically be avoided, then do not go ahead with the retrenchment. Simply send a letter indicating that you have decided not to go ahead with the retrenchment.
However, if after considering all the proposals made, you still have to go ahead with the retrenchment, then proceed to the next step.
Step 4: HAVE A SECOND MEETING WITH THE AFFECTED EMPLOYEES
Action Steps:
At the meeting, please discuss the items below.
Remember to make detailed written notes on the date and time and the responses:
- Explain that you have considered the proposals made.
- Explain why those proposals will not work.
- Explain that you will be going ahead with the retrenchment.
- Get all parties to sign the minutes of the meeting.
REQUIREMENT NUMBER 5: SEND A WRITTEN NOTICE OF TERMINATION
Before dismissing the employee, you need to send them a written notice advising them of this. That written notice must cover the following:
Dear (Employee name)
- With reference to the notification of anticipated retrenchment and subsequent consultations between yourself and the employer we regrettably have no other option than to terminate your services due to operational requirements.
- You will not be required to work the prescribed notice period. Your last day of work will be (insert date).
- You will receive the following in addition to normal wages due to you up to the termination date:
Your retrenchment package will amount to:
One week’s wages for every completed year of service in the employment
(Insert Severance Pay calculation here)
Payment of any outstanding leave = (insert number of days here)
Please note:
a) Normal deductions will still be applicable.
b) You will also receive a Certificate of service.
- Retrenchment is not a step lightly taken by Management, and has been done so as to secure the long-term future and stability of the business, without which it may be unsuccessful, which would jeopardize the employment of all Employees.
- If there are any queries arising from this notice, or any other way in which we may be able to assist you, please do not hesitate to contact me.
Yours faithfully
_________________________ ________________
SIGNATURE OF EMPLOYER DATE
__________________________ ________________
SIGNATURE OF EMPLOYEE DATE
To download this letter, click here.
Now we move onto calculation of severance in more detail
Chapter 3: How is a retrenchment package calculated
Section 35 (4) of the Basic Conditions of Employment Act states that if employees earn a basic salary plus commission and/or periodic incentive bonuses, the employer is required to calculate the employee’s average remuneration over the preceding 13 week period, and then use this average to calculate the severance pay.
In other words severance pay calculation must include:
- Basic salary
- Commission
- Incentive bonuses
How much of severance?
The company must pay an employee who is to be dismissed severance pay equal to one week’s salary for every completed year of continuous service with the company.
So, for example, an employee who has worked for a company for four years would be entitled to four weeks’ salary.
In the situation where employees have worked for the company for less than a year, the amount of severance pay is at the discretion of the employer.
The payment of severance pay does not affect an employee’s right to any other amount of pay owing such as leave pay, notice pay or commission.
In summary,
HOW IS A RETRENCHMENT PACKAGE CALCULATED
The following payments need to be made –
• Severance pay –
- Employees should be paid at least one week’s remuneration for each completed and continued year of service. (‘Remuneration’ includes basic salary, payment in kind and discretionary payments related to working hours or performance).
- Should an employee unreasonably refuse the employer’s offer of alternative employment with that employer or any other employer he/she will not be entitled to a severance package.
• Outstanding leave to be paid out.
• Notice pay (where applicable)
If employed for less than six months – one week’s notice;
if employed for more than six months but not more than one year – two weeks’ notice and if employed for more than a year – four weeks’ notice.
Domestic and farm workers, who have been employed for more than six months, must receive four weeks’ notice. The employer may require employees to work/not to work during the notice period.
• Other payments – depending on the employment contract, the following may be relevant — pro rata payment of bonus, pension and provident fund.
If you need help with this, you can purchase a paid consultation session with a certified Labour Lawyer who will help you do the severance package calculation. Click here to setup your appointment.
Now we move onto advanced tips for handling retrenchments in South Africa
Chapter 4 – Advanced tips and frequently asked questions for retrenchments in South Africa
What is retrenchment pay?
In terms of the law, when an employee is retrenched, he is legally entitled to severance pay as compensation. The severance pay is calculated as one week’s wages for each completed year of service with the employer.
Does the employee have to pay tax on his severance pay?
Under the Income Tax Act, severance benefits are treated like lump sums paid on retirement – employees get the first R500 000 tax-free and the balance is taxed depending on the amount that they received.
How do you declare the lump sum payment to qualify for the tax benefit?
As the employer, you must submit a tax directive application to SARS before the lump sum amount is paid to the employee.
You will apply for a tax directive by filling in an IRP3(a) form, and send it to SARS.
Upon receipt of this form, SARS will work out the correct amount of employees’ tax that you as the employer must withhold on the severance benefit.
The employee will then receive that benefit net of tax from you.
You then issue the employee with an IRP5 tax certificate reflecting the gross amount of the benefit and the employees’ tax that was deducted.
The SARS government website has more information on the tax directive. Click here for that: https://www.sars.gov.za/ClientSegments/Individuals/Tax-Stages/Pages/Tax-and-Retrenchment.aspx
If the employee goes to the CCMA, what are the outcomes that can affect my business?
If you did not have a fair reason to retrench the employee and you did not follow the correct procedure, then the employee has a good chance of winning their case at the CCMA.
If the employee wins the case, then they have 3 options:
i) reinstatement,
ii) re-employment or
iii) compensation.
Reinstatement means you get the employee job back exactly as it was prior to their unfair retrenchment together with whatever money is due to them.
Re-employment means the employee gets their job back but in a different position
Compensation means the employee gets money paid to them. This depends on how long the employee worked for you.
The longer the employee worked for you the more the employee will get. But this is capped at 12 months. The employee cannot get more than 12 months of their salary.
Can I present my case on my own at the CCMA?
Yes you can. But remember that winning cases at the CCMA is all about evidence. You need to have credible evidence to back up your case. Without evidence, your chances of winning are slim. Therefore please ensure that you have enough evidence to prove your case.
Good work. We covered
- What is the proper procedure to retrench employees under South African Law
- What documents are required for the retrenchment process
- How a retrenchment package is supposed to be calculated by law
Essentially your preparation is now complete. You have all your bases covered.
Please review the article above. In our experience it is very important to make sure you understand this properly.
We believe that the better prepared you are – the better chance you will have of succeeding in your case at the CCMA.
If you have a question or topic that you want us to cover, send us an email on ______. Please keep it to 3-4 paragraphs detailing your situation.
We get a lot of emails from the internet and from our paying clients, so please give us a few days to respond. Please be patient and we will get back to you.
However, if you want help immediately you can purchase a paid consultation session with a certified labour lawyer.
Our lawyers are proven experts in Labour Law – from handling Unfair Dismissal cases, to challenging retrenchments, they have a winning track record at the CCMA and the Labour Court. You can setup your consultation by clicking below.
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Now we would Like to Hear From You
Conclusion
We hope you found this Retrenchment guide helpful.
Now we would like to hear what you have to say:
Which tip from today’s post do you want to try?
Are you going to challenge the reason for the retrenchment?
Or maybe you are a business owner that has a question.
Either way, let us know by leaving a comment below right now.
