Retrenchment
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How is severance pay calculated in South Africa?

Under Section 41 of the Basic Conditions of Employment Act (BCEA), you are entitled to a minimum of 1 week's remuneration for each completed year of continuous service. Weekly remuneration is calculated as your monthly gross salary divided by 4.33. Part-years of service do not count toward the statutory minimum. Your contract or collective agreement may provide a more generous amount.

What is the notice pay I am entitled to when retrenched?

Under BCEA Section 37, the statutory minimum notice period is: 1 week if you have worked less than 6 months; 2 weeks if you have worked 6 to 11 months; and 4 weeks if you have worked 12 months or more. Your employer may either require you to work the notice period, or pay you the equivalent in lieu of notice. Your contract may provide a longer notice period.

Is retrenchment pay taxed in South Africa?

Yes, but it qualifies for special tax treatment. The severance pay portion is taxed using the SARS retirement and retrenchment lump sum tax table: the first R550 000 is tax-free (this is a lifetime limit across all such lump sums), the next R220,000 is taxed at 18%, the next R385,000 at 27%, and amounts above R1,155,000 at 36%. Notice pay, leave payout and pro-rata 13th cheque are taxed as normal income (PAYE). Your employer must apply to SARS for a tax directive before paying.

Does SARS tax outstanding leave pay on retrenchment?

Yes. Outstanding annual leave pay is taxed as normal employment income (PAYE) — it does not qualify for the special retrenchment lump sum tax treatment. The same applies to notice pay paid in lieu and a pro-rata 13th cheque. Only the severance benefit itself qualifies for the SARS lump sum table with the R550,000 tax-free threshold.

Am I entitled to a 13th cheque when retrenched?

Only if your contract of employment or a collective agreement provides for it. There is no statutory right to a 13th cheque in South Africa. If your contract does provide for one, you are entitled to a pro-rata share for the months you worked in that calendar or financial year.

What is the R550,000 tax-free threshold for retrenchment?

SARS allows a R550 000 tax-free threshold on the aggregate of all retirement fund lump sums and severance benefits received in your lifetime (from 1 March 2023 — previously R500,000). This means that if you have previously received a retrenchment or retirement lump sum, the remaining exemption is reduced by that amount.

Can I refuse retrenchment and still get severance pay?

No. If your employer offers you a reasonable alternative position and you refuse it without good reason, you forfeit your right to severance pay in terms of BCEA Section 41(2). However, if the alternative position is substantially different or offers materially worse conditions, a refusal may be considered reasonable.

Do I still get severance pay if I resign instead of being retrenched?

No. BCEA severance pay only applies when your employment is terminated by the employer for operational requirements (retrenchment). If you resign voluntarily, you are not entitled to statutory severance pay — only to your outstanding leave pay and any notice pay if applicable.