The payment of the severance gratuity has been tested and confirmed by the courts:
- In Ben and Another v Green Industrial Enterprises Corporation H (Botswana) (Pty) Ltd  B.L.R. 859, the court found that a severance benefit shall be payable at the conclusion of each period of 60 months’ continuous employment with the same employer.
- GODISANG v VANGUARD SECURITY 2008 3 BLR 240 stated that in terms of s 27(2)(a)(i), a fraction of a month should be taken as a complete month.
Is a Severance payment due to an employee who is a membered of a retirement fund?
The payment will depend of whether the employee receives a return of their contributions or whether they receive both the employee and employer contribution. In the case of OBIDITSWE AND ANOTHER v SARNIA (PTY) LTD 2007 (1) BLR 597 (IC), the Court held that if the employer did have a pension fund and:
- if an employee was entitled to a refund of only his or her contributions, then such refund was not a gratuity and the employee was entitled to payment of a severance benefit in terms of Section 27 of the Employment Act.
- if, on the other hand, an employee was entitled to a refund of both his or her contributions and the employer’s contributions, then such refund was a gratuity and the employee was therefore not entitled to payment of a severance benefit.
Assuming the employer does not have a retirement fund
Assume an employee receives an Annual Basic Salary of BWP 120,000 per annum and is granted an annual increase of 5.0% each year. The employer should be funding 2.12% of the Annual Basic Salary during the first 5-year period and 4.23% thereafter. The calculations are shown at the end of this article.
Most employers simply pay this out of working capital when the amount is due. This action can prove to have a significant negative impact on cash flow where an employee, or several employees, with long service retire or resign; this is further exacerbated where the employee(s) have elected not to receive the payments after each 5-year period. Even more concerning, and an incident which triggered this article, is when significant retrenchments are made to long serving employees.
Our recommendation is that companies open a Money Market Fund and contribute into the Fund each month, as if it constituted pension contributions. The Money Market Funds in Botswana have averaged returns of between 3.0% to 3.5% annually compounded over the last 5 years.
The interest received less administration fees paid, will result in a surplus. At the end of the financial year, the liability to employees can be calculated and any surplus in the Money Market Fund can be paid back to the company.
This changes an “unfunded liability” into a “funded liability” as if a cheap pension fund was being used.