Severance Pay: What Employers Get Wrong in Retrenchments

Severance pay is often treated by employers as a simple calculation at the end of a retrenchment process.

In reality, it is one of the most misunderstood and frequently disputed aspects of retrenchments in South Africa.

Getting severance pay wrong can result in legal claims, delays in finalising retrenchments and unnecessary financial exposure. In some cases, it can also undermine an otherwise lawful process.

The Misconception: “It’s Just One Week Per Year”

Many employers believe that severance pay is straightforward:

one week’s remuneration for every completed year of service

While this is the statutory minimum under the Basic Conditions of Employment Act, it is not the full picture.

Problems arise when employers assume that:

• the minimum is always sufficient

• no negotiation is required

• the calculation is simple

• all employees must be treated identically

These assumptions often lead to disputes.

What the Law Actually Requires

Under South African law, employees dismissed for operational requirements are generally entitled to:

• at least one week’s remuneration per completed year of service

However, severance pay must be considered in context:

• It forms part of the broader retrenchment process

• It may be influenced by consultation

• It must be applied fairly and consistently

Importantly, severance pay is not always a fixed outcome. It can become a negotiated element during the section 189 consultation process.

Where Employers Commonly Get It Wrong

1. Treating the Minimum as the Default Outcome

Employers often approach severance pay as a fixed statutory obligation with no room for variation.

In practice, severance pay is frequently discussed during consultation. Employees may propose:

• enhanced packages

• alternative structures

• voluntary severance arrangements

Refusing to engage on this can create friction and escalate disputes.

2. Inconsistent Application Across Employees

Employers sometimes:

• offer enhanced packages to some employees

• apply different calculations without clear justification

• negotiate selectively

This creates risk.

Inconsistent treatment can lead to allegations of unfairness and may undermine the integrity of the retrenchment process.

3. Misunderstanding “Remuneration”

The calculation of severance pay is not always as simple as it appears.

Questions often arise around whether remuneration includes:

• bonuses

• allowances

• commissions

• benefits

Incorrect calculations are a common source of dispute, particularly where employees believe they have been underpaid.

4. Using Severance Pay to “Settle” the Process

Some employers attempt to resolve retrenchment risk by offering higher severance packages in exchange for a smoother process.

While this may seem commercially sensible, it can create unintended consequences:

• expectations among other employees

• inconsistencies across the workforce

• difficulty justifying differential treatment

More importantly, a higher severance payment does not cure a defective process.

5. Ignoring the Link to Refusal of Alternative Employment

Employees who unreasonably refuse an offer of alternative employment may forfeit their entitlement to severance pay.

This is often overlooked.

Employers who fail to properly manage or document alternative offers may lose the opportunity to rely on this provision.

The Real Risk: Severance Disputes Escalate Quickly

Severance pay disputes rarely exist in isolation.

They often form part of broader challenges to the retrenchment process, including:

• unfair dismissal claims

• procedural challenges

• disputes over consultation

What begins as a disagreement over calculation can quickly escalate into a full dispute.

A Practical Example

An employer calculates severance pay based on basic salary only, excluding regular commission and allowances.

Employees challenge the calculation, arguing that their true remuneration is higher.

At the same time, some employees are offered enhanced packages to secure voluntary exits.

Outcome:
The process becomes inconsistent and open to challenge. Employees raise disputes regarding both the calculation and the fairness of the overall process.

Why Employers Lose Severance Pay Disputes

Employers typically do not lose because they refuse to pay severance.

They lose because:

• the calculation is incorrect

• the approach is inconsistent

• the issue was not properly addressed during consultation

• the broader retrenchment process is flawed

Severance pay becomes a focal point for challenging the entire exercise.

How Employers Can Reduce Risk

To manage severance pay effectively:

• Ensure calculations are accurate and defensible

• Apply a consistent approach across affected employees

• Engage on severance during consultation where appropriate

• Document all offers, discussions and decisions

• Align severance with the broader retrenchment strategy

Severance should not be treated as an afterthought. It is part of the legal and commercial framework of retrenchments.

Final Thoughts

Severance pay may appear to be a simple statutory requirement, but in practice it is a common source of dispute and legal exposure.

Employers who approach it mechanically often create unnecessary risk. Employers who approach it strategically, within a properly managed retrenchment process, are far better positioned to avoid disputes.

Need Advice on Retrenchments and Severance?

Barter McKellar advises employers on section 189 processes, severance structures, retrenchments and Labour Court disputes.

If your business is considering retrenchments, ensuring that severance is handled correctly can prevent disputes and protect the integrity of the process.

Contact our team for practical, commercially focused labour law advice.