Payment for years of service:  basics to know

The idea of receiving a “payment for years of service” is a very common query, especially after an employee’s termination of service. Many employees, particularly those with many years of service, expect and anticipate being rewarded for their loyalty and dedication to an employer, sometimes believing that this is an automatic entitlement created by law. However, this is not true for the most part and employers must be clear on the legal requirements regarding such payments under South African labour law as legislation is very specific about when and how such payments are applicable.

The legal framework: severance pay under the BCEA

The primary legal foundation for “payment for years of service” in South Africa comes from Section 41 of the Basic Conditions of Employment Act 75 of 1997 (BCEA), which provides for severance pay.

When is severance pay due under the BCEA?

Section 41 of the BCEA stipulates that severance pay is only due to an employee when their dismissal is due to the employer’s operational requirements. These are situations where business’s operational requirements, such as economic, technological, or structural changes, force the employer to reduce their workforce.

Under these circumstances, the employer must provide the employee with severance pay equal to at least one week’s remuneration for each completed year of continuous service. This payment is calculated in terms of BCEA Section 35, which details how remuneration should be calculated.

Fixed term contracts and long service

In cases involving fixed term contracts, the situation can be slightly different. According to Section 198B of the Labour Relations Act 66 of 1995 (LRA), employees on fixed term contracts, who earn below the earnings threshold, and when the contract exceeds 24 months, may be entitled to severance pay upon their contract expiring.

It’s crucial for employers to understand that there is no general right to a “payment for years of service” outside of the provisions for severance pay under the BCEA and LRA. Employees are not entitled to such payments simply because they have worked for the business for many years.

Navigating employee expectations

Employers often face difficult conversations with employees who feel entitled to a “reward” for long service, particularly in the context of retirement or termination. While it might be beneficial for businesses to recognise long-standing employees through awards or other incentives, employers should not confuse this with a legal obligation.  Employers should be careful not to create expectations of entitlement in the minds of employees with regards to payment for years of service.  Employers should ensure that their workplace policies clearly outline the conditions under which severance pay is applicable and should provide training to managers on how to handle such requests.

The notion that employees should automatically receive a ‘big payday’ for their years of service is often rooted in the employee’s mistaken beliefs or expectations, and is not legally required unless specified in an employment contract, or in the context of retrenchment or other specific legal conditions.

Conclusion

In summary, while the notion of compensating employees for their years of service may seem like a normal form of recognition, it is not an automatic right under South African law. Employers are only required to pay severance pay under specific conditions, primarily when an employee is dismissed due to the employer’s operational requirements and upon the expiration of a fixed term contract as set out above. As long as employers adhere to the legal framework outlined in the BCEA and LRA, they can avoid misunderstandings and disputes over payments for years of service.

This article focusses on employment under the BCEA and there might be different laws applicable to your industry, which might be governed by a sectoral determination or collective agreement with different provisions regulating severance pay, and therefore employers are encouraged to seek legal advice when dealing with these issues, especially in cases of retrenchment or fixed term contract terminations, to ensure compliance with the right laws and avoid unnecessary claims or disputes.

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