What if the company has a retirement fund?
Section 79 (7) of the Labour Code (Amendment) Act 1997 states
Where an employer operates some other separation benefit scheme which provides more advantageous benefits for an employee than those that are contained in subsection (1) he may submit a written application to the Labour Commissioner for exemption from the effect of that subsection.
This was tested and confirmed by the courts in Econet Telecom Lesotho (PTY) Ltd v Dinah Ramona LC/REV/69/10.
Prudent methodology to deal with the Severance Pay
Most employers simply pay the Severance Pay 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. 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 a certain amount into the Fund each month, as if it constituted pension contributions. The Money Market Funds in Lesotho have averaged between 6.0% to 6.5% annually compounded over the last 5 years.
The difficulty associated with the current calculation methodology is that because the Severance Pay is based on the wages at time of termination, a generic contribution rate cannot be used. This however is not difficult to model, and the calculations below illustrate this: