The long-term effects of Covid-19 on businesses have become clearer. Short-term interventions, such as taking annual leave, temporary lay-off, short time and pay cuts, may no longer be appropriate. It may be necessary for a more permanent measure; i.e. retrenchment. But what payments are employees entitled to if they are retrenched?

The calculation of the payments associated with retrenchment can be rather complicated where employees have been temporarily laid off without pay, or have been working short time on reduced pay.

Considering that there has been a fluctuation of income, it would seem, at least on the face of it, that section 35(4) of the Basic Conditions of Employment Act (BCEA) should apply. This section provides as follows:

(4) If an employee’s remuneration or wage is calculated, either wholly or in part, on a basis other than time or if an employee’s remuneration or wage fluctuates significantly from period to period, any payment to that employee in terms of this Act must be calculated by reference to the employee’s remuneration or wage during –

(a) the preceding 13 weeks; or
(b) if the employee has been in employment for a shorter period, that period. (Underlining added)

A Ministerial Notice published in the Government Gazette on 23 May 2003 in terms of section 35(5) of the BCEA (which elaborates on payments that are included in an employee’s remuneration for the purposes of calculating leave pay, notice pay and severance pay), confirms that “If a payment fluctuates, it must be calculated over a period of 13 weeks …”.

The origins of an employee’s entitlement to leave pay, notice pay and severance pay, respectively, are different. Should these entitlements be calculated differently? Should the calculation of these entitlements be approached differently? The following is a summary of our views and conclusions.

Leave pay

Section 40 of the BCEA is very specific with regard to the calculation of leave pay upon termination of employment:

40. Payments on termination.—On termination of employment, an employer must pay an employee—

(a) for any paid time off that the employee is entitled to in terms of section 10(3) or 16(3) that the employee has not taken;

(b) remuneration calculated in accordance with section 21(1) for any period of annual leave due in terms of section 20(2) that the employee has not taken; and

(c) if the employee has been in employment longer than four months, in respect of the employee’s annual leave entitlement during an incomplete annual leave cycle as defined in section 20(1)—

(i) one day’s remuneration in respect of every 17 days on which the employee worked or was entitled to be paid; or
(ii) remuneration calculated on any basis that is at least as favourable to the employee as that calculated in terms of subparagraph (i). (Underlining added)

Conclusion: In most situations the part underlined part will apply because employees would not have completed a leave cycle. The calculation is straightforward. It also seems to be a fair way of calculating leave in respect of a period of lay-off or short time.

Based on subsection 40(c)(i), no leave would have accrued to an employee during a period of temporary lay-off. Although the section does not refer to reduced work hours, it seems logical that leave accrual should be reduced proportionately. [A sensible way to go about it would be to calculate leave at one hour’s leave for every 17 hours worked – similar to that provided for in section 20(2)(c) of the BCEA.]

[Comment: It would seem that section 35(4) of the BCEA and the Ministerial Notice are in conflict with section 40(c) above. Considering that section 40(c) specifically deals with the calculation of leave pay upon termination of employment, it is our view that it should prevail over section 35(4). It is, in any event, our view that a literal interpretation of the provisions of section 35(4) of the BCEA with regard to both leave accrual and leave calculation is inappropriate in the Covid-19 context – see our previous article at https://labourwise.co.za/labour-articles/annual-leave-in-the-covid-19-context ]

Notice pay

Once the retrenchment process has run its course, the employer may give an employee notice of termination of employment in terms of the contract of employment. If the employee has been laid off without pay until then and the employee is given notice, the question arises whether the employee must be paid for the period of notice. Is there something to be said for employees being paid in lieu of notice (‘notice pay’)?

The employer’s obligation to remunerate employees is suspended during a period on unpaid lay-off, or reduced during a period that employees work short time. An employee may remain employed during a period of notice. Nothing needs to change. There seems to be no logical reason why the employer should become obliged to pay an employee his or her full remuneration during a period of notice. The employee remains on lay-off without pay or on reduced work time with reduced pay.

In the light of the above, it would make no sense to conclude that employers are legally obliged to pay employees in lieu of notice. The issue of notice pay does not need to come into play.

Conclusion: If an employee happens to be on lay-off without pay at the time of retrenchment, the employer has no obligation to pay the employee during the period of notice, or to pay the employee in lieu of notice. Where the employee is working short time at reduced pay, this arrangement will simply continue during a period of notice. There is no reason why payment in lieu of notice should be any different.

Severance pay

Upon retrenchment an employer must pay an employee severance pay equal to at least one week’s remuneration for each year of continuous service with that employer.

A literal interpretation of section 35(5) of the BCEA and the Ministerial Notice, would have the consequence that an employee who happens to be on temporary lay-off without pay at the time of retrenchment, would not be entitled to any severance pay whatsoever, irrespective of the number of years’ service. An employee who happened to be working short time at the time of retrenchment would also be severely prejudiced.

As mentioned in a previous article, the national state of disaster, along with its consequences, was clearly not envisaged when section 35 and the Ministerial Notice were drafted. It surely could not have been the intention for employees to be prejudiced in this way. A literal interpretation would also be inconsistent with the primary purpose of severance pay; i.e. to provide a measure of interim financial security to the retrenched employee during the search for suitable alternative employment.

Conclusion: Where employees would be prejudiced due to having been laid off or working reduced work time, we would encourage employers to calculate severance pay with reference to the employees’ remuneration immediately prior to the national state of disaster.

Sectoral determinations and bargaining councils

Sectoral determinations and bargaining council agreements may contain provisions that would trump the provisions of the BCEA to the extent that they are different.

Other questions

As with our previous article, we have tried to look beyond a literal interpretation of the law. Instead we have proposed what we consider to be fair to both employers and employees.

Again, the commentary above may not adequately cover all possible scenarios. Readers are welcome to post their comments and questions.

Jan Truter for www.labourwise.co.za