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How do you calculate retrenchment package

Chantal Ross  : Who Why and How  do you retrench?
Probably the most significant part of the retrenchment process is deciding which employees to retrench. Employees to be dismissed should be selected according to selection criteria that have either been decided on and agreed to by the consulting parties or, if no criteria have been agreed on, criteria that are fair and objective.

It is tempting to retrench with the LIFO (last in first out) principle in mind. However, employers have to be extremely wary of simply following this criteria as it may not be in the best interests of the business, both from a financial and human resources perspective. As mentioned, the Labour Relations Act provides for 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 rational categories.
There are many factors within the selection of who to dismiss that can be measured against rational categories, thus ensuring that the process is fair and objective, so guarding against any subjectivity on the part of employers.

Categories or factors against which objectivity and fairness can be tested include length of service, skills and experience, attendance records or efficiency in performing the job. It would be prudent for employers to be aware that caution should be observed in the choice of criteria, and that criteria which are discriminatory or contrary to an entrenched constitutional right are to be avoided. 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 awareness that these criteria should never be a given fact.

The Labour Relations Act and the Basic Conditions of Employment Act (1997) have made provisions for what employees about to be retrenched are entitled to in terms of severance pay and further conditions of retrenchment.

According to Katinka Beeslaar, who is the Legal Advisor at The People Business � Human Resources Consulting cc, 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. Retrenchment packages must be put in writing and discussed in private with each affected employee.

However, in working out severance packages, Section 41 and Section 35 of the Basic Conditions of Employment Act must be read in conjunction with one another. Section 35 lays down the exact criteria for calculating the legally correct package. Employers need to be particularly aware of Section 35 (4), which 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. This definitely has a significant impact on the severance package!

If employers are able to do so, they can offer more money than required by the Labour Relations Act. If the business is in the process of being transferred as a going concern, calculation of severance pay will be determined based on the employee's length of service with the existing company. However, the employee about to be retrenched should be aware that the entitlement to severance pay falls away if an alternative offer of employment by the same or another company is made, and is unreasonably rejected by the employee.

In deciding what is reasonable versus what is unreasonable in this circumstance will depend on factors such as the remuneration (severance pay) offered, the personal circumstances and family responsibilities of the employee, the change in job status and job security.

Alternative employment that is offered at a considerably lower salary may be regarded as unreasonable on the part of the employer, and may therefore be refused without affecting severance pay. An alternative employment offer that is regarded as making continued employment intolerable to the employee could lead to a constructive dismissal dispute.

The employer has to tread warily in this situation and should carefully consider any alternatives to retrenchment offered by consulting parties during the consultation process. Employers are cautioned against offering alternatives from the company's side only because it is deemed the proper thing to do.

In summary, the choice of who to retrench is based on a number of factors, either those agreed on by all consulting parties or those deemed by the Labour Relations Act and the Basic Conditions of Employment Act as being fair and objective. To this end, there is a further set of criteria that are to be considered in a fair and objective decision. Employers should guard against criteria that are discriminatory or that go against entrenched constitutional rights.

* In the next Industry Insight in this series: Retrenchment is a stressful process for all concerned - what are the steps for an effective termination meeting?

What is the �one week per year of service� based on?

Question

Is the �one week per year of service� basic retrenchment package based on the employee�s latest earnings, or average, or does it apply to an employee whose salary is a percentage of his monthly debits?

Answer

If you calculate an employee�s pay on a basis other than time, or it fluctuates significantly from period to period, you must use the amount he earned in the preceding 13 weeks (take an average to get the sum for one week) (Section 35, BCEA).

Remember, severance pay includes the cash value of any payment in kind that forms part of his salary but excludes gratuities, allowances enabling him to work, and any discretionary payments not related to his hours of work or performance.

Until next time,

Nadia Pisanti
Managing editor: Labour Watch Newsletter

ZIETSMAN & OTHERS V TRANSNET LIMITED

Retrenchment: calculation of severance pay

Thu, 03 Apr 2008 09:00


Case No. JS 614 / 06
Judgment Date 21 June 2007
Jurisdiction Labour Court, Johannesburg
Judge Molahlehi J 
Subject Retrenchment: Severance Pay

Issue:

The Employees sought a determination on whether the calculation of the severance pay by the Employer should have included the dealer bonuses of each of the Employees as provided for in a bonus scheme agreed to by the Employer.

The court held that as long as the Employer complied with the statutory minimum payments, there was no additional entitlement to other payments.

Summary of Facts:

The 3 applicant Employees were retrenched by the Employer. They had all participated in a bonus scheme in terms of which bonuses were paid to them bi-annually.

When they were retrenched they were paid a severance package of 2 weeks� salary for each completed year of service. The Employees claimed that their severance packages were calculated incorrectly as the bonuses were excluded from the quantum of remuneration on which the 2 weeks� severance pay was calculated.

Summary of Judgement:

In exercising powers given to him in terms of section 35(5), the Minister published a schedule indicating payments to be included in an employee's remuneration for the purposes of calculating pay for severance pay in terms of section 41 of the Act.

In terms of this notice discretionary payments not related to an employee's hours of work or performance do not form part of the remuneration for the purpose of calculating severance pay.

The court held that where an employer paid more than what section 41 of the Act required, a section 35(5) calculation would not apply.

In this case, the Employees severance packages exceeded what they would have received had they been paid the statutory minimum calculated to include the bonuses.

As the Employees received more than what was provided for in section 41 of the Act and in the absence of an agreement to use the formula provided for in section 35, the court held that the Employer had complied with the requirement of the Act and that the Employees were not entitled to payment of their bonuses.

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