- Definition
- Why companies offer voluntary severance packages
- How it’s calculated
- Tax implications
- Can I claim UIF after accepting a voluntary severance payout?
- Conclusion
Many trucking companies are in the process of retrenching or have already laid off workers due to the unfavourable economic state of the country that was exacerbated by the lockdown to curb the spread of the Covid-19 disease in recent months.
As a result, enquiries about how the voluntary severance payout works have been mounting on us. SA Trucker gives you an analysis of this type of package to help you decide on what’s best for you if you have been affected.
What is Voluntary Severance Package?
A voluntary severance package is a ‘sweetened’ financial incentive that is offered to an employee to motivate them to resign or retire, usually offered by a company as it tries to reduce its workforce and cost of salaries and benefits.
Read also: The payout you’re entitled to after being retrenched
The voluntary severance package is sometimes referred to as the ‘golden handshake’ because of its benefits to both the employer and the employee who accepts the package.
As the term expresses, it is voluntary, and unike most severance packages, it gives the employee the option to decline the offer.
Why do companies offer voluntary severance package?
The primary reason for companies to offer severance packs is to avoid negotiating through the process of a fair retrenchment in terms of section 189 / 189(a) of the Labour Relations Act as well as the Basic Conditions of Employment Act.
Read also: Retrenchment bells ring at Manline freight
Companies will be able to avoid future lawsuits by having the employee sign a release in exchange for the package.
How it’s calculated
The Labour Law allows for a minimum payment of one week per completed year of service. In many instance companies are prepared to sweeten the deal if enough people take voluntary packages, thus preventing a formal involuntary process.
Tax implications
The Income Tax Act allows for a far more favourable tax treatment on retirement, death or severance benefits.
The first R500,000 severance benefit is tax free and the amount above R500,000 up to R700,000 is taxed at 18%.
Tax of 18% is charged on income up to R250,900. Only R25,000 is tax free if an employee makes early withdrawals from retirement funds.
When you talk about the retrenchment amount, you have to ask about the tax costs. Employees should ask for a very basic calculation to see what the impact of the tax liability will be.
If you were retrenched before the full R500,000 tax exempt amount may no longer available as it applies over your lifetime and not for every retrenchment event.
If the employer is not made aware of previous retrenchments an employee may end up owing SARS as the employer’s calculation would have omitted another chunk which was supposed to be taxed.
It has also happened that employers pay a severance amount but neglect to apply for a tax directive. The employee only becomes aware of the tax liability when he files his tax return months after receiving the amount and Sars taxes it as normal income.
Can I claim UIF after accepting a voluntary severance package?
NO, According to the South African Labour Guide, you cannot claim UIF if you have voluntarily resigned from the job. You can only claim unemployment benefits if you have been dismissed or retrenched or if the contract has expired.
Conclusion
A severance package can be negotiated. Understand your options and focus on what matters most to you. Check your contract or employee handbook to ensure the employer is complying with its severance policy.
Remember, you are not obliged to accept a voluntary retrenchment offer which in essence is what you accept by taking a voluntary severance package, if the payment terms are not acceptable.
However, it would be prudent to only reject an offer if the employee is fairly certain he will survive a formal retrenchment process, or if the offer is equal or lower than what he would get with an involuntary retrenchment process where he may only receive the statutory minimum.
