Retrenchment: The process, your rights, and your options

In trying economic times such as these, many businesses are being forced to review their business needs and operational requirements in order to survive into the future. Retrenchment, which is a form of dismissal from an organisation through no fault of the employee, is often an unavoidable consequence, although the onus remains on the employer to prove that the retrenchment was unavoidable and to provide fair reasons for it. Anyone who suspects that there is a chance of retrenchment in the future should take steps to educate themselves and to fully understand their rights.

The process

The process of retrenchment is strictly governed by the Labour Relations Act to ensure that due process is followed and the rights of employees are protected. In fact, Section 189 of the Act makes it clear that an employer cannot retrench employees without following the correct process, and failure to adhere to the process can lead to the retrenchment being deemed an unfair dismissal.

The first step in the process is for the employer to invite all interested parties, including employees, trade unions and bargaining councils, to a consultation where the employer is required to notify all parties that there may be retrenchments in the near future and to discuss possible alternatives. If retrenchment is unavoidable, the employer must issue each affected employee with a Notification of Retrenchment which must include reasons for the retrenchment, the selection process, and the details of the severance package, following which all affected employees must be given an opportunity to respond. The final step in the process is the issuing of a formal Notice of Termination which formally advises the employee that the working relationship will come to an end, including the effective date of the retrenchment.

It is generally always advisable to seek legal advice before signing a retrenchment notice, although understandably not everyone is in a financial position to afford such advice. There are many law firms and NPOs who provide pro bono legal advice so, as soon as you are invited to the initial retrenchment consultation, consider making contact with such an organisation. Besides for the Legal Aid Clinic, there are organisations such as ProBono.Org and the Law Society of SA who provide pro bono advice; and many of the larger law firms in South Africa have divisions that provide pro bono advice with links to their services available online. Together with legal advice, it is also advisable to seek financial advice from an independent advisor who can guide you through the financial decision-making process that follows a retrenchment.

In the first stages of a retrenchment process, it is common for an employer to offer employees the option to take a ‘sweetened’ retrenchment package if they volunteer to be retrenched rather than wait for the employer to make a selection. It is important to note, however, that ‘volunteering’ for retrenchment does not change the outcome – the employee is still retrenched and, from a tax perspective, any severance benefit or retirement fund lump sum received, will be treated the same. It also does not affect your ability to claim from UIF.

Your retirement benefits

Following your retrenchment, you will need to make important decisions regarding the money held in your employer’s pension or provident fund, keeping in mind that a lump sum from a retirement fund as a result of retrenchment is regarded as a ‘retrenchment benefit’ for tax purposes. Generally speaking, you have the following options available in respect of your retirement benefits:


You have the option to withdraw the capital in your employer’s pension or provident fund, although there are tax implications that need to be taken into account. Everyone is given a once-in-a-lifetime tax relief of R500 000 on their retirement lump sum, bearing in mind that a retrenchment severance benefit (see below) is considered and taxed as a retirement lump-sum benefit. Therefore, if you are retrenched, the first R500 000 of your combined severance and retrenchment benefit will be tax-free. Any further cash withdrawn will be taxed at the retirement tax table rates. It is important to bear in mind that SARS takes all previous taxable withdrawals, retirement (including retrenchment benefits) and severance benefits you have received into account. This includes severance benefits that accrued on or after 1 March 2011, and retirement lump sum benefits that accrued on or after 1 October 2007.

Capital preservation

If you decide to preserve your retirement fund benefits, you can leave your capital in your employer’s retirement fund providing that the fund rules make provision for this. Another option is to transfer the capital tax-free to a preservation fund which is a specifically designed vehicle for these purposes. An added benefit is that a preservation fund allows you to make one full or partial withdrawal during your lifetime. One limitation of a preservation fund is that you cannot make additional contributions to this fund. You may also consider transferring the capital on a tax-free basis to a new or existing retirement annuity to continue saving for retirement, although bear in mind that once the funds have been invested in an RA, you will not be able to access them before age 55.

Your severance package

A ‘severance benefit’ is the cash payment paid to you by your employer as a result of your retrenchment and, in terms of labour legislation, you are entitled to at least one week’s pay for each year of completed service – but it is important to check your employment contract as you may be entitled to more. The tax treatment of a severance benefit is the same as in the case of your retrenchment benefits (i.e. from your employer retirement fund), bearing in mind that you will be taxed on a combination of both benefits. SARS will therefore consider the combined value of your severance and retrenchment benefits, with the first R500 000 being tax-free. Thereafter, the next R200 000 is taxed at 18%, the next R350 000 at R36 000 plus 27% of taxable income above R700 000, and any amount over R1.05 million is taxed at 36%.

Apart from your severance benefit, you will also receive any monies owed to you in respect of over-time, leave, commissions, incentives or bonuses, depending on what is rightfully owing to you. These payments are in respect of services rendered and do not fall within the definition of severance benefits. As such, these payments are taxed according to the PAYE tables at your marginal rate.

You have a number of options regarding your severance benefits, and what you do with this money largely depends on your personal circumstances. If you are likely to need the money in the short term, rather put your cash in an interest-bearing account until you have more certainty regarding your future. Alternatively, you can consider investing this capital into a discretionary unit trust portfolio where it can achieve investment growth over the longer term. You might also want to use some of this money to settle debt and thereby reduce your monthly repayments, however it is important to find the right balance between paying off debt and ensuring that you have sufficient cashflow while you are looking for another job.

Finance and budgeting

One of the first steps following a retrenchment is to register for UIF, keeping in mind that there may be delays. Remember, a ‘voluntary’ retrenchment makes no difference to your ability to claim from UIF. Ensure that you have your Section 189 letter from your employer, certificate of service and settlement agreement, and remember that you can lodge your claim online at The next step is to draw up a ‘survival budget’ to tide you over while you seek alternative employment. One way of cutting costs, albeit temporarily, is to apply for a payment holiday on your loans, such as credit card, vehicle, or home loan repayments. When liaising with your financial institution, you will generally have the option of delaying the payment date of your next instalment, or to extend the terms of the agreement and pay back the loan over a longer period of time. However, taking a three-month payment holiday is not quite as simple as just missing three months’ worth of payments, Due to the capitalisation of the interest and other service fees, the amount owing could be substantial. Often, the best way forward is to approach your financial institution before defaulting on any payments and to ask them for a total restructure of the loan. If you have taken out credit life insurance as part of your financing agreement, check the terms of this cover to determine whether you are insured in the event of retrenchment as this could provide you with much-needed financial relief.

Moving forward

Although stressful, retrenchment often serves as a catalyst for positive change. If you’ve been retrenched, you may want to use the opportunity to set up your own business or change careers completely. However, before using your severance package to start a new business, spend time doing your market research and putting a workable, realistic business plan together. Avoid feeling pressured into setting up your business in a rush. Rather, seek advice and spend time researching your product or service to ensure that your business has a better chance of success – even if it means waiting a few extra months before launching.

If you’re close to retirement age when retrenchment happens and you don’t believe your chances of re-employment are good, you will need to think very carefully about how best to use your severance package. Rather than dipping into your severance pay, consider investing this capital in a discretionary portfolio to create liquidity in later in your retirement, and seeking alternative forms of income in the years leading up to your retirement. You may want to consider renting out a garden cottage or section of your home, tutoring, contract or freelance work, monetising a hobby or passion such as giving photography or computer lessons, or finding part-time work in the gig economy.

Regardless of the reasons for retrenchment, it is generally always a stressful and emotional ordeal to withstand. The most important advice for those facing retrenchment is, however, never to panic and make knee-jerk reactions. Stay as calm as possible, and be intentional about seeking legal and financial advice so that you are guided and supported by experts throughout the process.

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