De Wet v World Luxury Hotel Awards (Pty) Ltd (C 763/15) [2016] ZALCCT 31 (1 September 2016)

Principle:

Severance pay may be due where it is a contractual right and not dependent on a statutory right based on termination for operational requirements.

Facts:

Seven years after embarking on a business venture a new contract of employment was signed.This employment contract contained an unusual clause with regard to severance pay, stating that in the event that the employee's employment was terminated for any reason other than that of gross dishonesty, the employee would be entitled to the payment of the severance package.
The Labour Court was asked to interpret this contract, holding that the contract allowed the employee to terminate employment and claim severance pay even though the termination did not arise because of operational requirements.

Extract from the judgment:

[20]   The main bone of contention is the claim for severance pay. It hardly needs to be stated that a claim for severance pay for an employee who resigned of her own accord is highly unusual. But then, so is the clause in the contract; it even provides for severance payment where the employer dismisses the employee for misconduct, other than gross dishonesty. It reads:

"12. SEVERANCE

12.1.   In the event that the employee's employment is terminated for any reason other than that of gross dishonesty, the employee shall be entitled to the payment of the severance package on the terms as set out below.

12.2.   Where the firm is sold to a party other than the employee, the employee shall be entitled to a payment of a lump sum (a x b) calculated at 15% of her last month's salary within the firm's employ (a) multiplied by the period 1 September 2006 to the date of severance (b).

12.3.   Where the employee's employ within the firm is terminated, the employee shall be entitled to a payment of a lump sum (a x b) calculated at 7.5% of her last month's salary within the firm's employ (a) multiplied by the period 1 September 2006 to the date of severance (b).

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Evaluation

[25]   Against the background of these principles, the Court has to decide two issues:

25.1.   Is the applicant entitled to severance pay even though she resigned?
25.2.   If so, what is the basis for calculation: remuneration or basic salary?

Entitlement to severance pay

[26]   In order to decide whether the applicant is entitled to severance pay in terms of clause 12 of the contract, the starting point is the language of the clause itself.

[27]   It hardly bears repetition that the clause is an unusual one; but, as Mr Lourens conceded in his testimony, he is bound by the contract as it stands; "it is what it is", whether he took the trouble of reading it properly before he signed it and initialled each page or not.

[28]   The clause is unusual because it does not provide for severance pay only if the contract of employment is terminated for operational requirements. Neither does it provide for "no fault" dismissals only, contrary to what Mr O'Dowd initially proposed. Indeed, it is quite clear that, even if the employer had to dismiss an employee for misconduct, other than gross dishonesty, she would still be entitled to severance pay - it provides for payment in the case of termination for any reason other than gross dishonesty. That is a highly unusual scenario.

[29]   In Exactocraft, the question was whether the employee was entitled to severance pay in terms of ss 41 and 84 of the BCEA when he retired and was then contracted to work for the company again, after which he was retrenched. But in this case, the applicant's claim is founded in contract. It is clear from the contract itself that she would be entitled to severance pay even if she were to be dismissed for misconduct other than gross dishonesty. But is she entitled to it where she resigned?

[30]   Mr O'Dowd argued that the clause is only intended to deal with termination at the behest of the employer, i.e. dismissal. But that is not what it says. Perhaps, in future, the parties will be alive to the dangers of drafting in the passive voice. But because they chose to enter into an agreement that the applicant's representative had drafted in the passive voice, this dispute was referred to this Court.

[31]   Clause 12.1 states - in peremptory terms - that the employee "shall be entitled" to severance pay "in the event that the employee's employment is terminated for any reason other than that of gross dishonesty." Clearly, she would be entitled to severance pay if the employer dismissed her for any reason other than gross dishonesty. That is a termination at the instance of the employer. But resignation is termination of the contract at the instance of the employee. The language of the clause itself, therefore, does not restrict it to termination by the employer.

[32]   The parties made a contract. And as Mr Lourens accepted, they must live with it. As the LAC stated in Young v Lifegro Assurance Ltd, to which Mr O'Dowd referred:

"It is for the parties to the contract of employment to agree on the terms and conditions which will govern their relationship including the rights and obligations which will flow from the termination of the agreement."

[33]   Turning to context, the context of the contract of employment as a whole must be taken into account. And in clause 5, under the heading - in bold capital letters - "TERMINATION OF EMPLOYMENT", the parties reiterate the trite principle that either the employee or the employer is entitled to terminate employment on written notice to the other party. Read together with clauses 12.1 and 12.3, that would suggest that, unusually, an employee terminates her employment is also entitled to severance pay.

[34]   With regard to the purpose and background of the contract, it is also significant that two different scenarios are envisaged in clause 12.2 and 12.3. If the firm is sold to a party other than the employee, she is entitled to a lump sum calculated at 15% of her last month's salary multiplied by the period 1 September 2006 to the date of termination. But, in terms of clause 12.3, in all other circumstances where her "employ within the firm is terminated", she gets only half that as severance. In that context, it is difficult to see why an employee who resigns - and thus terminates the contract of employment without any fault on her part - would not be entitled to the same, lesser, payment as an employee who is dismissed for misconduct other than gross dishonesty.

[35]   Lastly, then, the apparent purpose to which the clause is directed and the material known to those responsible for its production must be considered. Ms de Wet - the person responsible for its production - was clear in her evidence as to its purpose. Lourens refused to give her shares. She did not have a provident fund. She therefore calculated the amount of severance pay using the analogy of the industry norm for payments to provident funds, i.e. 7.5% of salary by the employee and 7.5% by the employer.

[36]   As the Court stated in Exactocraft

"As explained in the article by Holzmann and others, severance pay is both a form of compensation for a no-fault termination of the contract of employment as well as recognition of the employee's 'investment' in the employer's enterprise. This is captured in an early case which, in justifying severance pay, said the employee had 'sacrificed his best employment years in building, or contributing to, the business of the company'.

[37]   In this case, Ms de Wet also testified that the severance clause was included to recognise her years of service to the company. More specifically, she built it up from a mere concept to a business with a value of between R8 million (on Lourens's version) and R13 million (on her version).

[38]   Taking all these factors into account, I must conclude that, unusual as it is, the contract does provide for a peremptory severance payment to Ms de Wet, even in circumstances where she resigned.

[39]   The remaining question then is on what basis that payment must be calculated.

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Order

[49]   I therefore make the following order:

49.1.   The applicant is entitled to outstanding leave pay (except for her notice period) and to severance pay calculated on the basis of her salary as set out in clause 12.3 of her contract of employment.

49.2.   The respondent must pay the applicant the following amounts by 30 September 2016, together with interest calculated at 9% per year, due from the date of this judgement to date of payment:

49.2.1.   R518 715, 63 for outstanding leave pay;
49.2.2.   R243 040, 50 for severance pay;
49.2.3.   R26 550, 00 for short payment of her salary and in respect of an incorrect calculation on her payslips.

49.3.   The respondent must pay the applicant's costs, including the costs of counsel.