How Do You Get Paid When You Are Retrenched?

Retrenched employees in South Africa are entitled to two distinct payments: severance pay under section 41 of the Labour Relations Act 66 of 1995, calculated at one week’s remuneration for each completed year of continuous service, and notice pay (or payment in lieu of notice) under section 38 of the LRA read with section 37 of the Basic Conditions of Employment Act 75 of 1997. To be lawful, the retrenchment itself must follow a fair procedure under section 189 of the LRA, including a consultation process and the consideration of alternatives to dismissal. If the employer does not pay, the employee can refer an unfair-dismissal or severance dispute to the CCMA within 30 days of the date of dismissal, and ultimately to the Labour Court for review or enforcement.

What Retrenchment Actually Means in South African Law

Retrenchment is dismissal for the employer’s operational requirements — economic, technological, structural, or similar needs — under sections 188 and 189 of the Labour Relations Act 66 of 1995. It is not the same as voluntary severance, not a resignation, and not a fixed-term contract ending on its own terms. A valid retrenchment requires both a substantive reason (the employer’s operational requirements) and a fair procedure (consultation).

The LRA distinguishes retrenchment from misconduct and incapacity dismissals, both of which carry different procedural requirements and different compensation rules if found unfair. If the reason given by the employer is poor work performance or misconduct, section 41 severance pay does not apply, and the remedies on a successful challenge sit elsewhere in the LRA.

The Three Payments a Retrenched Employee Is Owed

Most retrenched employees are owed three distinct amounts, paid (or in some cases partly offset against each other) at the end of employment. They are calculated separately and, in some cases, taxed differently.

Payment	Source	What it covers
Severance pay	Section 41 of the LRA	Compensation for loss of the job — one week’s remuneration per completed year of continuous service.
Notice pay (or payment in lieu of notice)	Section 38 of the LRA read with section 37 of the BCEA	The salary the employee would have earned during the statutory notice period, paid instead of requiring them to work it out.
Leave pay-out	Section 40 of the BCEA	Any accrued but untaken annual leave at the date of termination.

Notice pay is taxed as ordinary remuneration and is paid separately from the severance pay. A common error is to fold all three into a single “package” figure — they should be itemised on the payslip and calculated separately.

How Severance Pay Is Calculated (Section 41)

The statutory minimum severance pay is one week’s remuneration per completed year of continuous service under section 41(2) of the LRA. The figure is a floor, not a ceiling: a contract, collective agreement, or sectoral determination may provide a more favourable formula, but never less.

What counts as “remuneration”

For the section 41 calculation, “remuneration” is the employee’s ordinary weekly wage at the date of dismissal. It does not include discretionary bonuses or pension contributions. The labour courts have, in some cases, read in fairer calculations for partial years of service, but pro-rata severance is not automatic — a non-completed year is not generally counted unless the contract or a collective agreement provides for it.

What counts as “continuous service”

Continuous service includes all unbroken time with the employer, including any probationary period at the start of employment. A break in service generally resets the count, although certain breaks (for example, retrenchment followed by re-engagement under a fixed-term contract that becomes permanent) can be aggregated depending on the facts.

What Section 41(4) Means and Whether It Still Applies

Section 41(4) of the LRA limits the statutory severance entitlement to employees earning below a stated earnings threshold. The threshold is updated periodically by the Minister and published in the Government Gazette. Employees earning above the section 41(4) threshold may be excluded from the statutory severance entitlement if the employer is insolvent or undergoing business rescue.

Because the section 41(4) threshold changes from time to time, the current figure should be confirmed against the Department of Employment and Labour’s published notice before any specific package is calculated or challenged. The principle — that high-earners can be excluded in an insolvency scenario — is settled; the threshold number is not.

Notice Pay and the BCEA Minimums

The minimum notice period under section 37 of the BCEA 75 of 1997 depends on length of service with the employer.

Length of continuous service	Minimum notice period
Less than six months	One week
Six months to one year	Two weeks
More than one year	Four weeks

The employment contract may extend but not shorten the statutory notice period. Payment in lieu of notice is permitted — the employer pays the employee’s salary for the notice period instead of requiring them to work it out. Notice pay is taxed as ordinary remuneration under PAYE and is paid separately from the severance pay.

Tax Treatment of Retrenchment Packages

The tax treatment of a retrenchment package depends on which component is being paid. The two main parts are taxed differently, and the difference matters.

• Severance pay is taxed under the SARS lump-sum tax tables in the Income Tax Act 58 of 1962, not as ordinary monthly income. The first portion of a retrenchment package is generally tax-free under the cumulative retirement-fund lump-sum formula; the balance is taxed at the cumulative rate.
• Notice pay is taxed as ordinary remuneration under PAYE, even though it is paid at termination. It is not part of the lump-sum calculation.
• Leave pay-out is also taxed as ordinary remuneration under PAYE in the period it is paid.

Where the employer pays both severance and notice, the two should be calculated separately on the payslip and reported separately to SARS — they are not a single lump sum for tax purposes. SARS publishes the current tax tables and the specific formula on its website; the exact tax-free threshold and rate depend on the employee’s other lump-sum receipts in the same year of assessment and should be confirmed against the current SARS tables rather than assumed.

The Section 189 Process: What the Employer Must Do Before Paying

A valid retrenchment is more than a letter and a payout. Section 189 of the LRA sets out a consultation process that the employer must follow before any dismissal takes effect. A retrenchment that bypasses that process is procedurally unfair, and the employee can challenge the dismissal at the CCMA on that basis alone, even where the substantive operational reason is accepted.

The s189 consultation steps

1. The employer must issue a written notice under section 189(3) of the LRA inviting the employee (or the workplace representative) to consult, disclosing the reasons for the proposed dismissal, the alternatives considered, and the number of employees affected.
2. The consultation must be meaningful — not a paper exercise — and must consider alternatives to dismissal, including short-time, redeployment, and voluntary severance packages.
3. The employer must select employees for retrenchment using fair criteria (typically length of service, skills, aptitude, and the operational needs of the business) and apply those criteria consistently across the affected group.
4. Once consultation is concluded, the employer issues the retrenchment letter, calculates the package, and pays out.

Large-scale retrenchments under section 189A

Section 189A of the LRA governs large-scale retrenchments — those involving 10 or more employees. It adds a 60-day consultation framework and the obligation for the employer to disclose a written socioeconomic impact report. The additional obligations are not optional, and a failure to comply will weigh against the employer in any subsequent CCMA or Labour Court challenge.

Common Mistakes Employees Make

Several recurring errors weaken retrenched employees’ position when they later try to challenge the package or the process.

• Signing a settlement without understanding the severance calculation. Once a settlement agreement is signed, it is hard to reopen and the employee’s statutory LRA claims may be waived. Get the calculation reviewed before signing.
• Mistaking a contract end-date for a retrenchment. A fixed-term contract ending on its own terms is not a retrenchment and does not carry the same statutory severance entitlement under section 41 of the LRA.
• Missing the 30-day CCMA referral deadline. An unfair-dismissal dispute must be referred within 30 days of the date of dismissal (the date of the retrenchment letter, not the date of payment). Late referrals are possible only with condonation, which is not automatic.
• Failing to challenge a procedurally unfair retrenchment. Even if the substantive operational reason is valid, a flawed consultation process can lead to reinstatement or compensation of up to 12 months’ remuneration.
• Treating the retrenchment package as the same as a retirement package for tax purposes. The tax treatment is different and the calculation should be reviewed separately, ideally with a tax practitioner.

What To Do If Your Employer Doesn’t Pay

1. Request a written statement of the calculation. Under section 41(7) of the LRA, the employer must provide a written statement of the severance pay calculation on request, within a reasonable time.
2. Refer a dispute to the CCMA. If the employer does not respond or the calculation is wrong, refer an unfair-dismissal or severance dispute to the CCMA within 30 days of the date of dismissal.
3. Escalate to the Labour Court if needed. The CCMA may conciliate or arbitrate the dispute; if arbitration does not resolve it, the employee can approach the Labour Court for review or enforcement.
4. If the employer is insolvent, the employee may have a claim against the Unemployment Insurance Fund for unpaid severance under section 35 of the Unemployment Insurance Act 63 of 2001.

Retrenchment disputes are routed through the CCMA, not the ordinary Magistrate’s Court or the High Court. In Gauteng, the matter is conciliated and arbitrated at the relevant CCMA regional office — Johannesburg, Pretoria, or Tshwane — and any escalation to the Labour Court is filed in the Labour Court sitting in Johannesburg, which serves the Gauteng region. The Gauteng Division of the High Court does not handle retrenchment disputes; labour matters follow the CCMA and Labour Court route.

Other Practical Considerations

• UIF. Retrenched employees are entitled to UIF benefits (subject to the contribution record) and should register with the Department of Employment and Labour without delay.
• Medical aid. The employer may be required to advise on continued medical aid cover; the employee often needs to register on a new scheme within 30 days of termination to avoid waiting periods.
• Severance vs. ex gratia. Ex gratia payments above the statutory minimum may carry different tax treatment and should be documented separately on the payslip.
• References. The employee is entitled to a written certificate of service on termination under section 42 of the BCEA.

Frequently Asked Questions

How is retrenchment pay calculated in South Africa?

Retrenchment pay is the combination of severance pay (one week’s remuneration per completed year of continuous service under section 41 of the LRA), notice pay (or payment in lieu of notice under section 38 of the LRA read with section 37 of the BCEA), and any accrued untaken annual leave. The severance figure is a statutory minimum — a contract or collective agreement may provide a more favourable formula, but never less.

What is the difference between severance pay and notice pay?

Severance pay is compensation for the loss of the job itself, calculated at one week’s pay per completed year of service. Notice pay is the salary the employer owes the employee for the statutory notice period, paid in lieu of requiring the employee to work out that notice. The two are calculated separately and are taxed differently.

Do I have to be paid severance pay if I am retrenched?

Yes. Under section 41 of the LRA, an employee who is retrenched and has at least one year of continuous service is entitled to at least one week’s remuneration per completed year of service. The entitlement may be excluded where the employer is insolvent or undergoing business rescue and the employee earns above the section 41(4) earnings threshold published by the Minister.

How long does an employer have to pay retrenchment packages?

The LRA does not fix a uniform payment deadline, but the BCEA requires all termination payments — notice, leave, and severance — to be made within a reasonable time after the date of termination. If the employer delays beyond a reasonable period, the employee can refer a dispute to the CCMA for failure to pay.

Is retrenchment pay taxed differently from normal pay?

Yes. Severance pay is taxed under the SARS lump-sum tax tables, not the monthly PAYE tables, and the first portion of the lump sum is generally tax-free under the cumulative retirement-fund lump-sum formula. Notice pay is taxed as ordinary remuneration under PAYE. The exact tax-free threshold and rate depend on the current SARS tables and the employee’s other lump-sum receipts in the same year of assessment.

What do I do if my employer refuses to pay my retrenchment package?

First, request a written statement of the calculation from the employer under section 41(7) of the LRA. If the employer does not pay or the calculation is wrong, refer a dispute to the CCMA within 30 days of the date of dismissal. If the CCMA process does not resolve the issue, the employee can approach the Labour Court for review or enforcement against the employer.

Can I be retrenched without a process?

No. Section 189 of the LRA requires the employer to consult meaningfully with the employee (or the workplace representative) before retrenching — issuing a written notice, considering alternatives, and selecting employees using fair criteria. Section 189A adds a 60-day consultation framework for large-scale retrenchments. A retrenchment that bypasses the consultation process is procedurally unfair and can be challenged at the CCMA.

How long do I have to challenge a retrenchment at the CCMA?

An unfair-dismissal dispute must be referred to the CCMA within 30 days of the date of the dismissal (the date of the retrenchment letter, not the date of payment). Late filing is possible with condonation, but condonation is not automatic and the employee must show good cause for the delay and reasonable prospects of success on the merits.

Does fixed-term contract ending count as retrenchment?

No. A fixed-term contract ending on its own terms is not a retrenchment and does not carry the same statutory severance entitlement under section 41 of the LRA. Section 198B of the LRA may give an employee on a fixed-term contract of more than three months some protection against dismissal before the contract expires, but the contract end itself is not retrenchment.

Retrenchment disputes are time-sensitive — the 30-day CCMA referral window runs from the date of the retrenchment letter, not the date of payment. If you have been retrenched and need to confirm whether your package has been calculated correctly, whether the section 189 process was followed, or whether to refer a dispute to the CCMA, Burger Huyser Attorneys’ Labour Law practice can advise. The firm’s head office is at 49 First Avenue, Linden, Randburg (011 888 0246), with branches across Gauteng in Pretoria, Centurion, Sandton, Roodepoort, Bedfordview, Alberton, and Midrand. Marius Ferreira is the firm’s specialist consultant on Labour Law matters, and the practice carries the firm’s 4.8/5 average across 250+ Google reviews (Trustindex verified — “Top Rated Law Firm in South Africa”).