With about 500 000 jobs expected to be cut this year, either you or someone you know will be affected, so it is important to know your rights.
Brian Patterson of Deneys Reitz says South Africans are fortunate to be protected by the Labour Relations Act, which sets out conditions that have to be met before employers can retrench staff. ”In the United States most companies can just tell their employees to leave as they are employed ‘at will’.
There have been industries where employees have been told by text message not to come back tomorrow,” says Patterson.
While the US may have employment ”at will” contracts, it does not pertain to its South African subsidiaries. If you work for an international company that demands a head cut because head office is not profitable, Patterson says, South Africa law prevails and the local subsidiary will still have to prove the merits of a retrenchment process for the local operations.
Patterson says there are three grounds for retrenchment: for economic reasons, the company needs to restructure to meet operational needs or because of new technologies that bring about economies of scale. If a local company is growing and needs to maintain its staff base, the local subsidiary will have to explain to head office that a retrenchment is unlikely to be justified under South African law.
With any retrenchment there are procedures a company has to follow. If they are not followed an employee may have a case for unfair termination and could be awarded up to 12 months’ salary as compensation.
Consultation
An employer cannot present a retrenchment process as a fait accompli. Patterson says a consultation has to take place with employees and their representatives, who can at this stage make alternative proposals about how to cut costs or increase turnover. For example, in some mining consultations miners have agreed to work short time or overtime without additional pay to prevent a mass retrenchments.
Disclosure
Your employer needs to provide all relevant information about the retrenchment programme in terms of the statutory notice. This includes alternatives that have been considered, the number of employees that may be affected, the timing of the process and severance pay. Patterson says this is an area to which employers often give scant regard.
Re-applying for jobs
Patterson says a company can never ask you to re-apply for your job. This is a tactic often used in re-structuring programmes particularly within parastatals. The employer asks employees to fill in application forms for positions in the new structure and then informs employees if they have been successful.
Patterson says this is a way for companies to sidestep the retrenchment process and shift out certain employees. It is unlikely to comply with legislation. ”It suggests the person is out of a job already — but an employer has an obligation to find a position for the employee in the new structure as far as possible” he says If the employer has to replace someone whose application for re-employment fails, it is an unfair dismissal.
Last in first out
The law stipulates that the employer must follow an objective selection criteria of last in first out when retrenching employees, subject to skills, qualifications and experience. It is unusual for the court to accept an employer’s evaluation of performance or to permit the use of disciplinary records. It is important that this process is not used to weed out poor performers because retrenchment is a no-fault dismissal. Patterson says a company cannot ”cherry-pick” who it will retrench.
There are, however, situations in which an employee with less work service will be retained, based on skills, qualifications and experience.
For example, a factory with 20 pickers has to cut to 15 staff, but it needs one staff member with a forklift licence. The only person with a forklift licence was recently hired, and under last in first out should be retrenched. But because his skill is required, he will not have to be one of the five people retrenched.
Patterson says the experience, qualifications and skills caveat tends to be determinative in respect of senior management, but companies may still not apply it as a measure of Âperformance.
Severance pay
The law requires a minimum of one week’s severance pay for every completed year of service. But this is the minimum and not what companies should pay out as standard. It is important that during the consultation process a fair figure is reached.
”This is an area of abuse and it is important for employees to consult,” says Patterson. On average severance pay is about two weeks per completed year of service — some companies will even pay up to four weeks per year.
Post-retrenchment assistance
Your employer should consult on providing retraining programmes and outplacement services. Many companies agree to preferential rehiring within six to 12 months.
Early retirement
Patterson says that with the move to defined contribution pension funds there is not much benefit in taking voluntary early retirement. ”This is very rarely something employees get excited about, unless there is an improved benefit,” he says.
Full and final settlement packages
This is when the company offers an additional exgratia payment to employees to agree to the termination of their employment. The aim is to avoid the long and expensive retrenchment process. In return the employee signs away all rights to unfair dismissal claims in a full and final settlement.
The settlement will almost certainly be coupled with a confidentiality clause and a full and final settlement clause to achieve compromise.
Patterson says it is not possible to attach a full and final settlement clause to a payment that an employee is entitled to in law, for example notice or severance pay. There must be an additional exgratia payment to provide the basis for a settlement.
Patterson says the employer has to offer the same severance package to all employees within the division or face a challenge based on discrimination. The risk the company faces is that it cannot control who takes the package. For example a highly skilled black employee with high market value may take the package and step into another position, but the employer has now lost employment equity status.
Patterson says that, before agreeing to a serverance package, it is important to read the fine print. Otherwise there is no recourse.
What about tax?
The Receiver of Revenue gives very little assistance when it comes to retrenchment packages and it is something the national treasury should look into as a matter of urgency considering the crisis that many households may soon face.
According to Old Mutual, any severance pay you receive will fall into your gross income and therefore is taxed at average rates of tax. But you will qualify for a tax exemption on the first R30 000 of income.
If you are retrenched you may need to access your pension or provident fund. There are three possible tax treatments that might apply:
- Taxation as a withdrawal benefit: Withdrawal taxation will apply when the employee takes his or her withdrawal benefit as cash. The same tiered tax table will apply to both resignations and retrenchments. The legislation setting out the tax rates applicable from March 1 2009 has yet to be enacted but what is clear is that these rates are cumulative. This means that a decision to take cash now will not only mean you pay tax now but you may pay even more tax the next time you withdraw from a fund
- Taxation as a retirement benefit: If you are able to retire from the fund, a more generous tax table will apply. It is generally possible to retire early from the fund with your employer’s permission as long as you are 55 or older. In some funds you may even be able to take early retirement from age 50.
- Deferred taxation: It is possible to defer paying the tax if the fund benefit can be transferred to another employer fund or a preservation fund. No tax is payable on the transfer. When you withdraw or retire from the second employer fund or the preservation fund the benefit will be taxed as a withdrawal or retirement benefit.