Author: Karen van den Bergh
In South Africa, severance pay is governed by the Basic Conditions of Employment Act (BCEA), particularly under Section 41. It applies in cases of retrenchment or dismissal for operational requirements, and sometimes for constructive dismissal or mutual termination with severance agreement.
How severance pay is calculated:
Severance pay = One week’s remuneration for every completed year of continuous service
- What counts as “remuneration”?
- Not just basic salary – it includes:
- Basic wage/salary
- Housing or transport allowances
- Bonuses (if regular)
- Cash value of any benefits (e.g. food or accommodation)
- Commission (if regular)
SARS and the BCEA follow the principle of “total remuneration”, not just base salary.
For example:
- Employee earns R6,000/month (R1,384.62/week)
- Worked for five full years
The calculation will be:
R1,384.62 × 5 = R6,923.10 severance pay
- Important conditions
| Condition | Explanation |
| Only for retrenchment or operational dismissal | Not for misconduct, resignation or incapacity dismissals |
| Must be a completed year of service | Partial years are not counted unless agreed otherwise |
| Employee must accept severance offer | If they unreasonably refuse alternative employment, they may forfeit severance |
| Not taxed (if ≤ R550,000 lump sum) | Tax-free under certain conditions (SARS directive applies) |
- Severance ≠ notice pay ≠ leave pay
Separate from:
- Notice pay (if notice isn’t worked out)
- Accrued leave pay
- Pro-rata bonuses (if part of contract)
Frequently asked questions
Is an employee entitled to severance if they resign?
- No, severance is not due on resignation unless agreed contractually.
Can an employer offer more than one week per year?
- Yes, this is the legal minimum. Some employers offer two weeks per year or more.
Does a fixed-term contract qualify?
- Only if early termination was due to retrenchment and not due to contract expiry.
Contact one of our payroll specialists for more information.