When a retrenchment is unfair, what happens to the severance already paid?

Aadil Patel is director and national practice head, employment practice of Cliffe Dekker Hofmeyr.

In this case an employee was retrenched by the employer and paid a severance package. The employee subsequently referred an unfair dismissal dispute to the CCMA. The arbitrator found that the employee's retrenchment was unfair and ordered retrospective reinstatement (including seven months' back pay).

The arbitrator specifically declined to deal with the issue of the employee's severance pay. The employer took the arbitration award on review on the basis that, amongst other things, the arbitrator failed to order the employee to repay his severance package in spite of the fact that the employee had been retrospectively reinstated. An order of retrospective reinstatement places the employee in the financial position he would have been in had he not been dismissed, and gives him his job back. The employer's contention was that the employee had sustained no loss that justified him retaining the severance package. The result of the award was that the employee was reinstated and allowed to keep his severance payment of approximately R1.3 million.

A reviewable irregularity

The Labour Court found that the arbitrator was obliged to deal with the repayment of the severance package because the severance payment occurred only as a result of the employee's retrenchment. The arbitrator's failure to do so therefore constituted a reviewable irregularity.

The court stated that, because the employee was reinstated to his previous position, he was placed in a position as if no dismissal had taken place. Under these circumstances the employee would have suffered no loss that was not addressed by an order of reinstatement with full back pay. In light of the relief granted by the arbitrator, the court found that the employee was no longer entitled to the severance package, which was intended to soften the blow of the retrenchment. Chetty AJ concluded, at paragraph 25, that: "There can be no justification for a result where [the employee] is reinstated with full back pay and retains a severance package which far exceeds the amount of his back pay. It is a decision that a reasonable decision maker would not reach."

This case sets a new principle that, in circumstances in which an employee is retrenched and subsequently found to have been unfairly dismissed, the payment of the compensatory relief is subject to the repayment of the employee's severance package.