Section 41(2) of the Basic Conditions of Employment Act, 1997 ("BCEA") states that an employer must provide severance pay to an employee who has been dismissed on the basis of an employer's operational requirements. This pay should be equal to at least one week's remuneration for each completed year of continuous service with the same employer. However, section 41(4) qualifies this entitlement, stating that if an employee unreasonably refuses to accept an employer's offer of alternative employment, that employee will be will not be entitled to severance pay.

Although the BCEA sets minimum terms and conditions of employment, parties to an employment contract may agree to terms and conditions that are more favourable to an employee than those prescribed in the BCEA. As far as severance pay is concerned, it is not uncommon for a collective agreement or a contract of employment to provide for the payment of severance pay in excess of that prescribed by section 41(2). In addition, an agreement may be reached to this effect during a retrenchment consultation process.

Importantly, sections 41(6) to (9) specify a procedure for the resolution of disputes concerning "the entitlement to severance pay in terms of this section.". These disputes can be referred to the Commission for Conciliation, Mediation ("CCMA") or a bargaining council with jurisdiction and can ultimately be referred to arbitration.

In National Union of Metalworkers of South Africa and Others v SCAW South Africa (Pty) Ltd the High Court had to deal with important questions that arose regarding the right of parties to a contract of employment to agree to severance pay in excess of that provided for in section 41(2).

Background

SCAW South Africa (Pty) Ltd ("SCAW") embarked upon a retrenchment consultation process during which it offered alternative employment to members of the National Union of Metalworkers of South Africa ("NUMSA"). These offers were rejected. When the consultation process was concluded, SCAW terminated the employment of these employees. In terms of their employment contracts, they were entitled to severance pay in excess of that set in section 41(2). SCAW refused to pay the severance pay because, in its view, they had unreasonably refused to accept an offer of alternative employment.

NUMSA, on behalf of its members, sought an order in the High Court to the effect that SCAW, in refusing to pay the contractually agreed severance pay, was acting in breach of contract.

The court was tasked with determining the following issues:

  • did the court have jurisdiction to determine the issue?
  • could SCAW rely on the protection afforded to employers under section 41(4) of the BCEA in circumstances where it was contractually obliged to pay the employees severance pay in excess of that prescribed by section 41(2)?
  • if SCAW was entitled to utilise the protection offered by section 41(4), could the court determine whether the employees were entitled to a severance benefit or should the matter have been referred to the CCMA or a bargaining council with jurisdiction?

The High Court judgment

The court held that it had jurisdiction to deal with the issue because NUMSA's claim was based on the express terms of a written contract of employment and not the entitlement to severance pay as prescribed by section 41 of the BCEA.

The court also found that section 41(4), and the protection it afforded, applies to contractual claims because the constitutional right to fair labour practices means that the provisions of the BCEA must be construed to recognise both the interests of the employee and the employer. The entitlement to severance pay, whether founded in contract or section 41 of the BCEA, remains subject to the provisions of section 41(4).

Employers should not be discouraged from offering severance pay in excess of that prescribed by the BCEA by virtue of the fact that the protection offered to employers under section 41(4) of the BCEA will not be applicable to a contractual entitlement to severance pay. The Court ultimately found that SCAW could rely on the provisions of section 41(4) of the BCEA.

"This interpretation of ss 41(2) and 41(4) gives effect to the employer's right to fair labour practices by excluding liability on its part in the event of an employee's unreasonable refusal to accept an offer of alternative employment which would avoid the retrenchment. An agreement to pay an amount of severance pay higher than the minimum can never serve to exclude, from application, the protection afforded to employers in s 41(4). The applicants' construction of s 41 would lead to absurd results because it would deprive the employer of the protection afforded to it in s 41(4), on the basis of the employer having been more generous than it was statutorily obliged to be, in agreeing to a higher severance pay rate than the minimum. Such a construction would be contrary to the underlying purposes of the BCEA. It would disincentives employers from offering employees severance pay which is higher than the statutory minimum, for fear of losing the protection in s 41(4). This is inimical to the objective of protecting employees' interests, and of giving effect to the right to fair labour practices."

However, the court held that the dispute resolution procedure in section 41(6) of the LRA of the BCEA, which provides that the bargaining council or the CCMA may determine severance pay disputes, still applies. It held that the dispute remains one of labour law and is not a civil matter. The employees were therefore bound to pursue their dispute by referring the matter to the CCMA or a bargaining council with jurisdiction.

Comment

NUMSA sought contractual relief in the High Court. In terms of section 77 of the BCEA the Labour Court also has jurisdiction to consider contractual claims such as this. It is interesting to consider whether the Labour Court would have taken the same approach to the applicability of section 41(4) to contractual claims. To address this uncertainty, employers who are prepared to pay a severance benefit in excess of the statutory minimum should explicitly reserve the right not to pay the benefit if employees unreasonably reject offers of alternative employment.

Reviewed by Peter le Roux, an Executive Consultant in ENSafrica's Employment Department.

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