What is Retrenchment Compensation ?
Retrenchment compensation refers to the compensation payable to an employee by the employer in instances of being dismissed by the employer due to economic factors, restructuring or downsizing. This is usually for use by the employee on the way out of his or her employment.
What are the conditions for claiming Retrenchment Compensation?
The circumstances under which the retrenchment compensation may be claimed: -
· Employee's Length of Service: However, it should be understood that the provisions relating to compensation for retrenchment are available only in respect of those employees who have completed a period of one year with the organization (or industry or university) which is retrenching him or her.
· A portion of the workforce may not be eligible for the payment of retrenchment money; this depends with their contract of employment.
· Individuals being paid a salary in the organization Government employees and/or those employed in Statutory Organizations.
· Employees with low wages and in establishments with less than 10 employees (depending on type of business) are entitled to receive on being laid off or dismissed by the employer because of; economic reasons, restructuring or downsizing.
Exclusions: Part of the workforce may not be entitled to cash retrenchment depending on their contract type of employment.
These include:
o Employees working in a managerial or administrative capacity.
o Employees working in the government or statutory bodies.
o Employees in establishments with less than 10 workers (depending on the nature of the establishment).
3. Procedure for Retrenchment
• Notice Period: By law the employer is expected to communicate to the employee that he is going to be laid off or the employer should pay the employee in lieu of notice at least 1 month regardless.
• Government Approval: Redundancy discharge has to be supported by the right government department, commonly the Labour Commissioner depending on the Industrial Disputes Act if an employer has more than one hundred workers.
• Re-employment Priority: If the employer is committed to rehiring employees in the future, he or she must offer reemployment to retrenched employees on a basis of seniority.
Step-by-Step Calculation of Retrenchment Compensation:
Let’s take an example where an employee who has worked for 5 years is retrenched:
1. Step 1: By subtracting the monthly Standard Deduction then dividing it with the total basic pay earned in thirty-one days, come up with the Average Monthly Wages.
Let assume that the average wage of the employee has computed taking the total wages of the employee over the last 3 months as ?30000.
2. Step 2: Compute for 15 days’ wages for each completed year.
Entitlement for each year is a payment of fifteen days’ salary.
Daily wage = 30,000 divided by 30 then it will be ?1000.
This implies compensation increase each year = ?1,000 x 15 = 15,000
3. Step 3: Multiplied by Years Served
This means if it is the end of the 5 years’ employee, then the retrenchment compensation becomes 75000.
As a result, the retrenchment compensation given to the employee would be 75,000.
For more info, you can also check the official website of the Ministry of Labour & Employment.