Retrenchment and the Retrenchment Package

The shock of retrenchment can be devastating for all and life altering for some. What are you going to do and how are you going to provide for yourself and your dependants? Once the shock and numbness of the news subsides it’s time to take stock of your situation. Every crisis carries the seeds of future success so, instead of sinking into hopelessness and despair use the time positively to get going and work yourself into a better future. 

Here’s what you need to know about the retrenchment process.

What is Retrenchment?

Retrenchment is a form of dismissal due to no fault of the employee, it is a process whereby the employer reviews its business needs in order to increase profits or limit losses, which leads to reducing its employees.

The employer must give fair reasons for making the decision to retrench and follow a fair procedure when making such a decision or the retrenchment may be considered unfair.

The Elements of a Retrenchment Package 

1. Severance pay – a retrenched employee must at least be paid 1 week’s pay for each completed year of ongoing service. However, the employer must pay the retrenched employee the amount specified in any policy or his/her employment contract, if that amount is larger. If an employee refuses alternative employment with the employer or other employer, s/he will not be entitled to severance pay.

2. Leave – an amount of money equal to the annual leave, or time off, that has not yet been taken by the employee must be paid out.

3. Notice pay instead of working the employee’s notice period -

   1. if the employee was employed for less than 6 months, s/he must be paid 1 weeks’ notice pay;

   2. if the employee was employed for more than 6 months but less than 1 year, s/he must be paid 2 weeks’ notice pay;

   3. if the employee was employed for more than 1 year, s/he must be paid 4 weeks’ notice pay.

4. Other pay – depending on the employment contract this would be any pro-rata payment of a bonus, pension and so on.

5. Once an employee is retrenched, s/he is entitled to claim unemployment benefits (“UIF”).

Taxation of a Retrenchment Lump Sum

The lump sum payment that is paid to you will be taxed in one of two ways:

1. A severance payment together with the proceeds from a company pension or provident fund will be taxed according to the retirement tax tables where the first R500 000 is tax free provided the following conditions apply:

   1. The reason for your redundancy is due to a formal retrenchment process undertaken by your employer;

   2. At the time of retrenchment you do not own at least 5% of the share capital of the company.

2. All other payments will form part of your normal income and be taxed accordingly.

Important Notes on Retrenchment

• You as the employee have no choice in the matter of retrenchment

• A severance benefit can only be paid as a lump sum

• The amount qualified as a severance benefit can only be taxed according to the retirement tax table

• You cannot transfer severance benefits to a retirement fund

• You cannot defer or avoid tax on retrenchment lump sums

• Tax-free payments paid to you now will be deducted from the tax-free benefit of future retirement fund lump sum payments paid to you

What impact will retrenchment have on my group life benefits? 

Retrenchment will terminate your membership to the company retirement fund and any associated group insurance benefits will be terminated as well. 

In some instances, the fund or employer may offer the employee a conversion option – meaning that they can convert the group life policy to an individually-owned life policy at a predetermined rate. 

It is important to note that future alterations of conversion options are generally very limited. 

What impact will retrenchment have on my medical scheme? 

The medical scheme membership will generally also terminate with employment. 

In some instances, the medical scheme is open to the general public in which case the employee will be able to continue membership in their personal capacity at their own cost. However, there are some medical schemes that are specifically linked to employment in which case a new medical scheme will be needed.

The Benefits of Seeking Advice

Retrenchment can push back your retirement date due to insufficient retirement savings yet, prudent decisions taken on your retrenchment package now may go a long way towards saving your retirement plans in the future. 

Considering the above, it is advisable to seek financial advice to successfully navigate the retrenchment process. 

Article produced by Karimma Erasmus from Capstone. This is a sponsored article. If you would like to sponsor an article request our rate card:  contact RecruitMyMom.
Karimma Erasmus, CFP® Karimma is a Certified Financial Planner with 20 years’ experience in the financial services industry.  She specialises in retirement fund consulting to numerous company retirement funds and provides financial planning and investment advisory services to individual, corporate and institutional investors.