Posts in category: Retrenchment

In the Labour Relations Act 66 of 1995 sections 189 and 189A deals with the procedure of retrenchment.

The Labour Relations Act (LRA) is very specific when looking at this process with special reference to the parties involved and the process that they would have to follow in order for the process to be legitimate. Legislation also distinguishes between small and bigger employers and the process each has to follow when retrenching employees.

Employers should be aware that the reasons for the decisions they have taken to retrench staff are to be very carefully assessed at the CCMA or by the union. It is therefore prudent that employers retrench staff for the right reasons and not try to make up excuses for staff to be retrenched. In giving their reasons employers should always be open and honest in there communication to employees and their unions and should have information such as financials, production etc. available to present to the afore-mentioned parties should they request the information. Disclosure of information forms a very important part of this process and a high premium is placed on the honesty of employers.

Payment of severance benefit

Although the minimum payment for the severance benefit is calculated at 1 week for every year worked the company may negotiate a different benefit with the retrenched employee(s) in that the benefit is calculated to an amount more than 1 week for every year worked. In this regard it is important to be supplied with a copy of the final agreement between the employer and employee to ensure correct payment. In some instances an existing agreement between the employer and the union or the bargaining council may be applicable.

Retrenchment is a swear word in any language and no matter how well the human resource department followed the procedures  and how nicely they explained the process and the package there will always be anger and sadness from the employees being retrenched.  As the payroll administrator it is our job to make sure that the money side (yes that is what the employee really cares about) is correct. Let’s not aggravate the situation by not paying the retrenched employee properly.

SO The following needs to be paid

·         1 week for each completed year

·         Notice pay as per contract

·         Leave pay outstanding

The R30 000 exemption that previously applied to retrenchment gratuity lump sums has been repealed with effect from 1 March 2011. “Severance benefit” payments will now be taxable in terms of the retirement fund lump sum benefits tax rates with effect from 1 March 2011.

In terms of the new regulations the first 300 000 in an employee’s lifetime will be seen as tax Exempt. This amount includes all retrenchments payouts over the employees lifetime as well as payments made when retiring. Thereafter a sliding scale of taxation is introduced.

It is our strong that you apply for a tax directive ((how to apply click here) before finalizing the payment.

SARS says:

An employer is required to apply for a tax directive if this type of remuneration is paid to an employee – the exemption shall be determined by SARS with the processing of the tax directive application. The gross amount of the severance benefit must be reflected under code 3901 on the IRP5/IT3(a) tax certificate and the employees’ tax withheld in terms of the directive,

under code 4115. This is applicable to severance benefits payable to employees from 1 March 2011.

No UIF  is to be deducted for the tax free portion. It is a great idea to get a tax directive for each retrenched employee