CR386 Termination of contract/ retrenchment claim


Termination of contract/ retrenchment claim

Termination of long-standing contract/retrenchment benefit claim/consideration of form of employment.

The background of the matter is as follows:

1. Mr W was employed at a State Department as an independent contractor, through a consulting agency, from 1 April 2010 up to 30 March 2017, at which time his contract was not renewed.  In a letter dated 6 November 2017 from the agency, addressed to Mr W, the contract was not renewed due to budget cuts.

2. He had taken out a Salary Protection policy: Retrenchment and Injury cover only, commencing on 1 October 2012, and terminating on 30 September 2021. The cover was R75 000 per month, at a premium of R1 141, which had escalated at 6% per annum.

3. In the sales call Mr W stated that as he was a contractor, he needed to cover himself if he loses his income. The consultant did advise him later on that he does not provide advice, only information. During the call the consultant informed him on the retrenchment cover as set out below in paragraph 6.

4. The complainant advised that he submitted a retrenchment claim later in 2017 which was eventually declined on 6 December 2017. He provided some details to our office on the liaison with the bank and unfortunate circumstances endured from the termination of the contract up to the time that he submitted his complaint to our office.

5. Mr W was aggrieved due to the insurer‘s stance that the claim cannot succeed as he was not considered a permanent employee and a formal retrenchment process was not followed in the termination of his contract.

6. The policy under the heading “Retrenchment” states:

“About retrenchment

 * Bank will provide a monthly payout for a maximum of six months, provided that the following conditions are met:

• Your employer must have followed a formal retrenchment process.

• You cannot be self-employed or employed by any of your family members in any capacity whatsoever.

• The salary protection insurance must have been in force for at least six months before the retrenchment process started.”

*Full name of Bank not provided

7. The retrenchment claim was declined as (a) Mr W was not permanently employed (b) the employer did not follow a formal retrenchment process in the termination of his services and (c) his contract came to a natural end.

8. We asked the insurer to consider that a contract that is renewed over several years creates the expectation of contract renewal and points to permanent employment and that one could not hold the insured to the fact that the employer did not follow a formal or legitimate retrenchment process. In this case, Mr W had stated that there had in fact been several consultations between him and the agency (effectively his employer), before the contract was terminated. The insurer responded that the claim could not succeed because:

  • The agency confirmed Mr W was an independent contractor and not an employee.
  • His contract came to a natural end.
  • He was paid an hourly rate and there were no deductions for UIF or employee benefits.
  • The nature of the budget cuts at the State Department, where Mr W was contracted to, was not stipulated and adverse conditions had not been confirmed.
  • There was no indication of a retrenchment process being followed by the employer.
  • The minimum criteria had not been met and the claim cannot succeed.

9. Mr W responded by emphasizing:

  • He cannot be penalised if there is no information about the reasons for the budget cuts, but he can inform that when the agency loses an income from a client, there are budget cuts and he and two other contractors were affected.
  • His contract was renewed over 12 years at the agency until budget cuts affected him.
  • He paid PAYE.
  • The agency extended his contract for (only) another month which indicates there was a consultation process when the company experienced adverse conditions.
  • At a minimum, he worked 8 hours a day times the number of workdays per month.

10. This matter was submitted to the adjudicators’ meeting.

Meeting’s consideration and decision:

11. The meeting considered the policy requirements, as set out in paragraph 6 above. The criteria do not include the requirement for the insured to be “permanently employed” as suggested by the insurer. The meeting focused on the exclusion of “self-employed” persons. The question that arose was whether Mr W, in the circumstances and taking cognisance of “employee” definitions and the understanding of the factual employment relationship, could be considered an “employee”.  An “employee” enjoys retrenchment cover as opposed to a contractor that offers his services through his own enterprise.

12. Section 213 of the Labour Relations Act, 1995 (LRA) defines an employee as:

“(a) any person, excluding an independent contractor, who works for another person or for the state and who receives, or is entitled to receive, any remuneration, and (b) any other person who in any manner assists in carrying on or conducting the business of an employer, and ‘employed’ and ‘employment’ have meanings corresponding to that of employee.”

13. However, the above must be read with Section 200A of the LRA and section 83A of the Basic Conditions of Employment Act, 1997 (BCEA), which provide that until the until the contrary is proved, a person who works for, or renders services to, any other person, is presumed, regardless of the form of the contract (emphasis added), to be an employee if any one or more of the following factors are present:

“i)The manner in which the person works is subject to the control or direction of another person;

ii)the person’s hours of work are subject to the control or direction of another person;

iii)in the case of a person who works for an organisation, the person is a part of that organisation;

iv)the person has worked for that other person for an average of at least 40 hours per month over the last three months;   

v)the person is economically dependent on the other person for whom that person works or renders services;  

vi) the person is provided with tools of trade or work equipment by the other person;

vii) or the person only works for or renders services to one person.”

 14. It is evident from the above provisions that our labour legislation presumes that a person is an employee notwithstanding what a contract may be called or the form it takes. The law effectively looks at the substance of the relationship/agreement.

15. Mr W’s contract had rolled over for a period of 12 years with the agency and he worked for at least 40 hours per week. He did not provide his services to any other entity and was under the control and instruction of this company. The factual employer/employee relationship between him and the agency had brought him within the four corners of the definition of “employee”. The meeting was of the view that he ought to enjoy the protection the policy affords to an employee in terms of retrenchment.

16. The other criterion in the policy relates to the requirement that the employer must have followed a formal retrenchment process. We reiterated that it was not Mr W’s fault that his employer did not provide details of the consultations or the “budget cuts”.  From the information at our disposal, the logical conclusion is that his position became redundant when his employer could not pay his salary due to budget cuts and that these followed from adverse, structural, economic or operational factors, suffered by the employer, and this impact, affected future work for him. He is adamant that he and two other contractors had formal consultations with the employer prior to termination, in any event.

17. The format of “a formal retrenchment process” may not necessarily mean the legislative process or documented by the employer. It may take the shape of meetings with the employer where the termination is considered. It was our view, from the information provided to us, that Mr W was dismissed due to operational requirements after consultations with his employer, and notice provided to him that his contract would not be renewed.

18. After due consideration of the factual employment relationship and the reason for the termination of the contract, the meeting concluded that a recommendation be made to the insurer to consider admitting this claim for the retrenchment benefit.

Insurer’s response:

19. The insurer responded that it had noted the recommendation by this office and that it had concluded that it was willing to make an exception to its business rules and pay the retrenchment benefit. They asked for Mr W’s banking statements to prove unemployment.


20. Mr W was paid the retrenchment benefit as set out in the policy. The file was closed.