The question of whether employees are entitled to severance pay is a well-established aspect of South African statutory labour law. While the circumstances under which severance pay becomes due to employees are relatively limited, it’s not uncommon for employees to ask to be paid for their “years of service” during dispute resolution processes. Many employees who have dedicated many years of service to their employers expect their employers to reward them with some form of payment upon the conclusion of the working relationship. This payment amounts to recognition of the years of loyal service rendered by the employee. Other employees feel they have a legal right to this benefit, regardless of the reasons for terminating employment. It simply makes sense to receive a reward for years of loyal service.

Most employers should know that statutory severance pay arises when employment relationships are terminated due to employers’ operational requirements. However, in this article, we unravel the reasons behind this query and explore the notion of being rewarded for years of loyal service by employers.

Severance pay is not unique to South African labour law, and many countries provide similar entitlements through statutes or common law. According to DW De Villiers (2010) 22 SA Merc LJ 114-126 at 116, two schools of thought underpin the rationale for severance pay benefits:

The Vested Rights Viewpoint:

This perspective posits that employees accrue vested rights based on their tenure. The longer an employee’s service, the greater their entitlement to severance pay. This viewpoint is grounded in the principle of employment protection, where compensation is paid for the termination of employment, regardless of whether the employee secures alternative employment.

The Lifeboat Principle:

In contrast, the lifeboat principle suggests that employees are entitled to a financial cushion to tide them over during periods of unemployment resulting from no fault of their own. Under this perspective, severance pay is seen as an interest-based support system rather than a reward for long service. Many legal experts and recent judgments from the Labor Court favour the lifeboat principle, emphasising support during unemployment over rewarding years of service.

However, it’s crucial to note that there is no general right to severance pay outside the statutory framework of the Basic Conditions of Employment Act (BCEA). Section 41 of the BCEA stipulates the conditions under which severance pay is mandatory, primarily concerning dismissals due to operational requirements.

Section 41 of the BCEA stipulates that:

(1) An employer must pay an employee who is dismissed for reasons based on operational requirements or whose contract of employment terminates or is terminated in terms of section 38 of the Insolvency Act severance pay equal to at least one (1) week remuneration for each completed continuous year of service to the employer as calculated in terms of section 35 of the Act.

(2) An employee will only be entitled to severance pay once retrenchment has been concluded. The Bargaining Council and Main Agreements to the Council will stipulate the severance package payable if the employee is a member of a bargaining council.

Operational requirements are defined as terminations resulting from the employer’s economic, technological, structural, or similar needs. These are classified as “no-fault” dismissals, meaning they are unrelated to the employee’s performance but stem from the business’s operational needs. Suppose an employee meets the requirement of at least one year of uninterrupted service. In that case, they become eligible for a severance package calculated at one week’s remuneration for each completed year of service.

While there may be other scenarios in which severance pay entitlements arise, these are covered in our forthcoming articles. Generally, employees cannot claim entitlement to severance pay beyond the provisions of Section 41 of the BCEA. The idea of receiving a “reward” for years of service as a vested right does not enjoy broad application in South African law.

Article by Aletta Eksteen

Dispute Resolution Official at Consolidated Employers Organisation (CEO SA)