How unfair dismissal compensation is calculated 


Labour Law expert Ivan Israelstam outlines the factors that influence compensation amounts. 

Section 194 of the Labour Relations Act (LRA) allows arbitrators and judges to grant employees compensation for unfair dismissal where reinstatement is not appropriate. 

A compensation order is one that requires the employer to pay the employee an amount of money in recompense for unfair dismissal or an unfair labour practice. An order for compensation at the CCMA, bargaining council or Labour Court is not intended as an order for damages but merely as a payment made to ‘console’ the employee for the loss of a right (the right not to be unfairly dismissed). 

As a result the calculation of the compensation amount is not required by the LRA to be based on any specified criteria, rules or guidelines except that the amount must: firstly, not exceed twelve months where there has been an ordinary unfair dismissal; secondly, not exceed twenty-four months where there has been an automatically unfair dismissal; and, lastly, be fair and equitable in all circumstances.

Up to judges and arbitrators discretion

Judges and arbitrators have a very wide discretion in view of the fact that the term “fair and equitable” is itself not defined and is open to interpretation.

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In Hoffman vs SA Airways (CLL Vol. 15 No. 3 October 2005) the Court said that the determination of appropriate relief calls for the balancing of various interests that might be affected by the remedy, and that this must be guided by the following objectives:

  • To address the wrong resulting from the infringement
  • To deter future violations
  • To make an order that can be complied with
  • Fairness to all affected
  • To take into account the nature of the right infringed and the nature of the infringement itself.

Reasoning for compensation can appear arbitrary 

In practice, many Labour Court orders contain some explanation of how the judge arrived at the compensation amount but many arbitration awards do not contain any reasons for the amount of the compensation awarded. Many of these decisions appear to the onlooker to be arbitrary. 

Just as problematic is the fact that, in those case where reasons for the compensation amount are given, there is little consistency in the reasoning from case to case. A multitude of reasons for the compensation amount have been given including the following according to CLL Vol.15 No.3 (October 2005):

  • The circumstances and consequences of the dismissal
  • Whether or not the dismissal was grossly unfair
  • The employer’s circumstances
  • Any loss that the employer might have suffered due to the employee’s misconduct that gave rise to the dismissal
  • The employee’s circumstances
  • The seniority of the employee
  • The employee’s actual income or other specific amount lost
  • The need to punish the employer or to deter employers from dismissing employees unfairly
  • Whether or not the employer acted in good faith or was misguided
  • The blameworthiness of the employee.

The fact that the calculation of compensation is unregulated and is so varied makes it entirely unpredictable. Employers therefore need avoid getting into a situation where they have to pay compensation, the amount of which may be at the whim of an arbitrator.

Ivan Israelstam is the chief executive of Labour Law Management Consulting

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