Essence

An employee’s claim for severance pay was upheld as it was based on the employment contract and included resignation

Decision

DW v World Luxury Hotel Awards (Pty) Ltd (C 763/15) [2016] ZALCCT 31 (1 September 2016)

Significance

There is no doubt that former employees have a statutory claim for severance pay if the reason for dismissal is based on operational requirements and they do not unreasonably refuse alternative employment.  But in terms of the BCEA such employees must have been employed for at least one year before dismissal.  Now the LC has correctly upheld a claim for ‘severance pay’ where the employee resigned and based the claim solely on an alleged breach of the employment contract and not the BCEA.

Reasons

“[20]     The main bone of contention is the claim for severance pay. It hardly needs to be stated that a claim for severance pay for an employee who resigned of her own accord is highly unusual.  But then, so is the clause in the contract; it even provides for severance payment where the employer dismisses the employee for misconduct, other than gross dishonesty.”

Discussion by GilesFiles

There nothing surprising in the notion of employees receiving severance benefits in addition to reasonable notice of termination except when they materially breach the contract.  This is in accordance with a holistic approach to termination of employment adopted by the ILO Convention of 1982.  Employees only forfeit such rights when the reason for dismissal is validly and fairly related to a material breach of contract, such as gross misconduct or dishonesty.  The ILO and the LRA accept that the reason for dismissal is not dependent on ‘fault’ but on ‘commercial rationality’.  The degree of fault impacts on the potential forfeiture of certain statutory rights.

Quotations from judgment

[20]     The main bone of contention is the claim for severance pay. It hardly needs to be stated that a claim for severance pay for an employee who resigned of her own accord is highly unusual.  But then, so is the clause in the contract; it even provides for severance payment where the employer dismisses the employee for misconduct, other than gross dishonesty.  It reads:

12.  SEVERANCE

12.1 In the event that the employee’s employment is terminated for any reason other than that of gross dishonesty, the employee shall be entitled to the payment of the severance package on the terms as set out below.

12.2 Where the firm is sold to a party other than the employee, the employee shall be entitled to a payment of a lump sum (a x b) calculated at 15% of her last month’s salary within the firm’s employ (a) multiplied by the period 1 September 2006 to the date of severance (b).

12.3 Where the employee’s employ within the firm is terminated, the employee shall be entitled to a payment of a lump sum (a x b) calculated at 7.5% of her last month’s salary within the firm’s employ (a) multiplied by the period 1 September 2006 to the date of severance (b).”

Entitlement to severance pay

[25]     In order to decide whether the applicant is entitled to severance pay in terms of clause 12 of the contract, the starting point is the language of the clause itself.[26]     It hardly bears repetition that the clause is an unusual one; but, as Mr Lourens conceded in his testimony, he is bound by the contract as it stands; “it is what it is”, whether he took the trouble of reading it properly before he signed it and initialled each page or not.[27]     The clause is unusual because it does not provide for severance pay only if the contract of employment is terminated for operational requirements. Neither does it provide for “no fault” dismissals only, contrary to what Mr O’Dowd initially proposed.  Indeed, it is quite clear that, even if the employer had to dismiss an employee for misconduct, other than gross dishonesty, she would still be entitled to severance pay – it provides for payment in the case of termination for any reason other than gross dishonesty.  That is a highly unusual scenario.  It also distinguishes the facts of this case from that of this Court in Rogers v Exactocraft (Pty) Ltd, to which Mr O’Dowd referred in his argument.  In that case, this Court adopted a purposive approach to interpreting the intention of the legislature in relation to severance pay in the context of s 84 of the BCEA.  The Court also noted:

“The purpose of severance pay has been the subject of some debate.  A comprehensive study showed that the origin of mandated severance pay can be traced to three main events: the creation of labour codes; the first events of large scale industrial restructuring starting at the end of the 19th century and pressures of the interwar high unemployment episode; and the expansion of the welfare state after WWII.  Despite these common origins, the review of existing severance pay programs showed that countries use widely differentiated designs, or at least parameter values.  The paper also examined the economic rationale for severance pay and found partial support for all three hypotheses it advanced: that severance pay serves as a social benefit payment, a human resource management tool, and a job protection mechanism.

In another article, the author considered South African case law (none of which specifically dealt with the application of s 84 in the circumstances of this case) and came to the conclusion that s 41(4) of the BCEA rewards the employer for offering or securing alternative employment for the employee.   It promotes sustained employment by giving employers an incentive to procure alternative employment for employees facing dismissal for operational requirements.  Absent such an offer, the employer has to pay severance pay – whether it is to “tide the employee over” until he or she finds another job, as some commentators would have it, or to reward the employee for long service, does not really matter.”

[28]     In Exactocraft, the question was whether the employee was entitled to severance pay in terms of ss 41 and 84 of the BCEA when he retired and was then contracted to work for the company again, after which he was retrenched. But in this case, the applicant’s claim is founded in contract.  It is clear from the contract itself that she would be entitled to severance pay even if she were to be dismissed for misconduct other than gross dishonesty.  But is she entitled to it where she resigned? [Emphasis added][29]     Mr O’Dowd argued that the clause is only intended to deal with termination at the behest of the employer, i.e. [sic]  But that is not what it says.  Perhaps, in future, the parties will be alive to the dangers of drafting in the passive voice.  But because they chose to enter into an agreement that the applicant’s representative had drafted in the passive voice, this dispute was referred to this Court.[30]     Clause 12.1 states – in peremptory terms – that the employee “shall be entitled” to severance pay “in the event that the employee’s employment is terminated for any reason other than that of gross dishonesty.” Clearly, she would be entitled to severance pay if the employer dismissed her for any reason other than gross dishonesty. That is a termination at the instance of the employer.  But resignation is termination of the contract at the instance of the employee.  The language of the clause itself, therefore, does not restrict it to termination by the employer.[31]     The parties made a contract. And as Mr Lourens accepted, they must live with it.  As the LAC stated in Young v Lifegro Assurance Ltd, to which Mr O’Dowd referred:

“It is for the parties to the contract of employment to agree on the terms and conditions which will govern their relationship including the rights and obligations which will flow from the termination of the agreement.”

[32]     Turning to context, the context of the contract of employment as a whole must be taken into account. And in clause 5, under the heading – in bold capital letters – “TERMINATION OF EMPLOYMENT”, the parties reiterate the trite principle that either the employee or the employer is entitled to terminate employment on written notice to the other party.  Read together with clauses 12.1 and 12.3, that would suggest that, unusually, an employee terminates her employment is also entitled to severance pay.