Leave Pay, Notice Pay and Severance Pay – common calculation mistakes

Pay for leave, notice and severance is an area many employers don’t always get it right.

The calculation of these payments is covered by s35(5) of the Basic Conditions of Employment (BCOE).

The following payments are included in an employee’s remuneration for the purposes of calculating pay for annual leave in terms of section 21, payment instead of notice in terms of section 38 and severance pay in terms of section 41 –

1. Housing or accommodation allowance or subsidy or housing or accommodation received as a benefit in kind;
2. Car allowance of provision of a car, except to the extent that the car is provided to enable the employee to work;
3. Any cash payments made to an employee, except those listed as exclusions in terms of this schedule;
4. Any other payment in kind received by an employee, except those listed as exclusions in terms of this schedule;
5. Employer’s contributions to medical aid, pension, provident fund or similar schemes;
6. Employer’s contributions to funeral or death benefit schemes.

The following items do not form part of remuneration for the purpose of these calculations –

1. Any cash payment or payment in kind provided to enable the employee to work (for example, an equipment, tool or similar allowance or the provision of transport or the payment of a transport allowance to enable the employee to travel to and from work);
2. A relocation allowance;
3. Gratuities (for example, tips received from customers) and gifts from the employer;
4. Share incentive schemes;
5. Discretionary payments not related to an employee’s hours of work or performance (for example, a discretionary profit-sharing scheme);
6. An entertainment allowance;
7. An education or schooling allowance.

The value of payments in kind must be determined as follows –

1. a value agreed to in either a contract of employment or collective agreement, provided that the agreed value may not be less than the cost to the employer of providing the payment in kind; or
2. the cost to the employer of providing the payment in kind.

An employee is not entitled to a payment or the cash value of a payment in kind as part of remuneration if –

1. the employee received the payment or enjoyed, or was entitled to enjoy, the payment in kind during the relevant period; or
2. in the case of a contribution to a fund or scheme that forms part of remuneration, the employer paid the contribution in respect of the relevant period.

This schedule only applies to pay for annual leave accrued from the date of operation of this Schedule.

If a payment fluctuates, it must be calculated over a period of 13 weeks or, if the employee has been in employment for a shorter period, that period.

A payment received in a particular period in respect of a longer period (e.g. a thirteenth cheque) must be pro-rated.

This Schedule only applies to the minimum payments that an employer is required to make in terms of the Basic Conditions of Employment Act, 1997.”

When the legislation was initially introduced in 2004 we held seminars and sent many emails about the changes in the BCEA legislation and Section 35(5), but we have noticed that a number of organizations still have not worked through these changes and we believe that a number of companies do not calculate Notice pay, Severance Pay, Leave Pay paid out on termination or Leave Pay (while on Annual leave) correctly.

Many still pay Notice pay, Severance pay, Leave pay paid out on termination or Leave pay (while on Annual leave) using only the basic wage or salary, perhaps correctly, but without any consideration of the change in legislation. This could lead to their actions being found to be irregular by the Department of Labour.

HRTorQue Outsourcing has recently dealt with labour cases where disputes as to the value of leave pay has not only cost the client a significant amount of money in terms of legal and consulting costs but also led to the employer settling on a value that exceeds that legislatively prescribed.

What should you as an employer do?

By taking a few easy steps you can mitigate most risk in this regard.

• Utilise the services of an external consultant – this shows the company has endeavoured to interpret and apply the legislation taking into account the specifics of its own organisation. This significantly reduces the risk of non-compliance.
• Follow a process and document your decision making

This legislation is however quite complicated and can result in an increase in payroll bills if a proper documented process is not followed. The basis of this action will include a decision to include or exclude certain allowances and an explanation as to why that decision was made. We advise that you make an appointment with David Beattie of HRTorQue Outsourcing by contacting him via email at [email protected]. Dave will send you a quotation covering the process that will be taken to get you through this process, with the output being a recommendation on whether or not to change your payroll calculations.

What process do we follow?

The process that will be followed during this consultative exercise is as follows:

• Consultation to introduce Section 35(5) of the Basic Conditions of Employment Act
• Identification of various cash payments, allowances, company contributions and fringe benefits
• Separation of income categories into income payments for ‘work done’ and ‘to enable work to be done’. This is an important step in the process.
• Identification of payments that are specifically excluded in terms of this legislation
• A report consolidating the process, findings and decisions made.

The outcome of this consultative process (the decision table) will be implemented into the payroll if you are an HRTorQue Payroll client

Where the employer would like a remuneration policy detailing the company’s treatment of leave payments, one will be drafted by a representative of HRTorQue Outsourcing’s HR Department. The cost of this policy will be quoted on separately.