Everything You Need to Know About Your Retrenchment Package

Published 25 November 2024

Authored by the Scorpion Legal Content Team, our team of writers and experienced legal professionals dedicated to providing clear, accurate, and actionable insights on legal topics.

1. Understanding Retrenchment and Retrenchment Packages in South Africa
2. Retrenchment Laws and the Consultation Process (Section 189)
3. How is a Retrenchment Package Calculated?
4. Factors That Influence a Retrenchment Package
5. Tips for Negotiating a Retrenchment Package
6. Tax Implications of Retrenchment Packages
7. What to Do If You’re Unhappy with Your Retrenchment Package

Facing retrenchment can be a challenging experience but understanding your rights and the structure of your retrenchment package under South African labour law can help you make informed decisions. This guide explains what you, as a South African employee, need to know about your retrenchment package, the legal framework that supports your rights, negotiating a retrenchment package and the relevant tax concerns.

1. Understanding Retrenchment and Retrenchment Packages in South Africa

In South Africa, retrenchment is legally recognised as a form of dismissal due to the employer's operational requirements, often linked to financial challenges or restructuring needs. It’s governed by the Labour Relations Act (LRA), which sets out guidelines to protect employees, including fair consultation processes, reasonable notice, and fair retrenchment packages.

When this happens, the employer must give affected employees a retrenchment package that includes severance pay, notice pay, outstanding leave pay and potentially other pay as well. Depending on your employment contract, you may be entitled to a pro rata payment of your bonus. A retrenchment package is a financial arrangement aimed at easing the transition for the affected employee.

Retrenchment must follow a specific procedure, as set out in Section 189 of the LRA. For a more detailed discussion of the retrenchment process, read our article here.

2. Retrenchment Laws and the Process (Section 189)

Before a business proceeds with staff reductions, it must follow a fair and transparent process to ensure that all employees are treated equitably throughout. The LRA requires employers to engage in a fair consultation process before proceeding with retrenchments. Here’s what to expect:

• Notice of Retrenchment / Notice to Consult: The employer is required to consult with employees who may be impacted, or their representatives, which could include a workplace forum, registered union, or appointed representatives as per any collective agreements. These individuals are referred to as the consulting employees.
  
  Employers must provide written notice of potential retrenchment and detail the reasons, alternatives considered, and criteria for selection. If you want more detailed information on what this looks like, please take a look at our article here.
• Consultation Process: Employers must consult with affected employees or their representatives to explore alternatives that could prevent retrenchment, like reduced working hours or pay, or moving employees into alternative roles. Consultation is a two-way communication process designed to ensure fair consideration of all options.
  
  During this process, the employer and employees should work towards reaching an agreement on key aspects mentioned in the notice. The employer should give consulting employees an opportunity to ask questions on the issues raised in the notice and any related concerns about the proposed retrenchment. Additionally, they should be able to present alternative solutions to retrenchment. If the employer disagrees with any proposals from the consulting employees, it must provide a reasoned response.
• Criteria for Retrenchment: If no alternatives can be found, selection criteria must be applied fairly. The LRA encourages criteria based on skills, experience, or length of service, rather than arbitrary or discriminatory factors. The selection of employees for retrenchment must be based on criteria that are either mutually agreed upon with the employees or are objective and fair.

Once the consultation phase is complete, the employer may finalise the decision and issue retrenchment notices to the affected employees.

3. How is a Retrenchment Package Calculated?

Under South African labour law, a retrenchment package may include several components, though some may vary based on the employer's policies and applicable bargaining council agreements:

• Severance Pay: According to Section 41 of the Basic Conditions of Employment Act (BCEA), the minimum severance pay is one week’s pay for every completed year of service. Employers may offer more than the statutory minimum, but this is at their discretion or per contract agreement – always check you employment contract for specifics.
• Notice Pay: Notice pay varies depending on the employment contract.
  
  • 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.
  If there is no contract, the employee is entitled to the following notice pay:
  
  • 1 week, for 1–4 weeks of employment
  • 2 weeks, for 4 weeks – 1 year of employment
  • 4 weeks, for more than 1 year of employment
• Accrued Leave Pay: Any unused annual leave must be paid out in full as part of the retrenchment package.
• Additional Payments: Depending on your employment contract, you could also be entitled to pro rata payment of an annual bonus.

4. Factors That Influence a Retrenchment Package

One of the most important factors to mention here is that the employer does not have to pay severance pay if an employee unreasonably refuses to accept an offer of employment with the current employer (for example, in another position or even for lower pay) or with another employer (sections 41(2), 41(4) of the Basic Conditions of Employment Act).

Severance pay for your industry may also fall under a bargaining council agreement, and you should make sure you know what these are and how they affect you, as they may differ from the minimum prescribed by the BCEA.

The primary factor in determining a retrenchment package is the length of service an employee has with the company. Employers generally use the LIFO (last in first out) principle: the longer an employee has been with the organisation, the more substantial their severance pay and benefits will be. The minimum severance pay is one week’s salary for every completed year of service, but employees can negotiate a better retrenchment package by themselves, through their trade union, or with a labour lawyer.

5. Tips for Negotiating a Retrenchment Package

Negotiating a retrenchment package can be challenging, but it’s your future and your finances, so step up and take control where you can. Start by reviewing your employment contract, company policies, and relevant labour laws to gain insight into what you are entitled to receive and what your rights are. This foundational knowledge will be a strong basis for negotiations.

Prepare a list of specific requests for your retrenchment package based on your needs and circumstances. This may include a higher severance payment, extended medical aid benefits, or additional career transition support. For example, if the company is struggling financially, they may not be able to provide additional severance pay but could give you help from HR in structuring your CV and finding another job. Communicate these requests clearly and confidently. Try your best to maintain a professional attitude – while understandable, emotional reactions can hinder productive discussions.

Handling your retrenchment package can be a lot to research and negotiate, and we strongly advise seeking advice from legal professionals, especially if you feel your rights are at risk. Our legal experts can provide invaluable help and guidance regarding negotiation practices and legal protections, and may help prevent problems before they occur – like signing a deal that isn’t in your best interests.

Interested in joining Scorpion Legal Protection? Click here.

6. Is Your Retrenchment Package Taxed?

It depends on the amount paid out. Retrenchment packages have specific tax exemptions. According to the South African Revenue Service (SARS).

Since 1 March 2023, the first R550 000 is not subject to tax. Amounts exceeding this threshold are subject to tax based on a sliding scale. To make the most of your package, consult a tax professional who can provide guidance based on current tax rates and your overall financial situation.

You can also find out about the tax benefits that come with a Scorpion Legal policy here.

7. What to Do If You’re Unhappy with Your Retrenchment Package

While no employee is particularly happy to find out they’re being retrenched, if you have a legal basis for your complaint then you have the right to take the matter to the CCMA. For example, if the employer paid you out less than the minimum set out by law, or they went against the terms of your employment contract, or didn’t follow the correct procedure.

You can refer your matter to the CCMA by filling in a CCMA referral form, also known as an LRA 7.11 form. You can download the form from their website here. You must do this within 30 calendar days of being retrenched.

We discuss the documents needed and the process in more detail here.

As the economic landscape continues to evolve, it’s vital for employees to stay informed about their rights and entitlements when it comes to their retrenchment package. Understanding the components of a retrenchment package, the laws that apply and protect you, what you should consider and how best to negotiate a retrenchment package can help you make an informed decision that’s in your best interests.

Having legal professionals to consult with and guide you through the process can make you feel less anxious and can also help you avoid potential traps from unscrupulous employers. Armed with this knowledge, and support, you’ll be better prepared to approach the next stage of your career with confidence and stability (and a good retrenchment package to keep you going while you do this!)

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The information contained on this website is aimed at providing members of the public with guidance on the law in South Africa. This information has not been provided to meet the individual requirements of a specific person and Scorpion Legal Protection maintains that legal advice be obtained to address a person’s unique circumstances. It is important to remember that the law is constantly changing, and although Scorpion strives to keep the information up to date and of high quality, it cannot be guaranteed that the information will be updated and/or be without errors or omissions. As a result, Scorpion, its employees, independent contractors, associates or third parties will under no circumstances accept liability or be held liable for any innocent or negligent actions or omissions by Scorpion which may result in any harm or liability flowing from the use of or the inability to use the information provided.