lethoto

LESOTHO

A BETTER WAY TO 

MANAGE GRATUITIES

In Lesotho, there is no legislative requirement that an employer must implement a retirement fund for workers. However, the Lesotho Labour Code 1992 (Act No. 24) states a severance payment must be made on termination:

  1. Severance payments

(1) An employee who has completed more than one year of continuous service with the same employer shall be entitled to receive, upon termination of his or her services, a severance payment equivalent to two weeks’ wages for each completed year of continuous service with the employer.

(2) An employee who has been fairly dismissed for misconduct shall not be entitled to a severance payment.

(4) For the purpose of subsection (1) the two weeks’ wages referred to shall be wages at the rate payable at the time the services are terminated.

(5) Where the termination of employment has been at the initiative of the employee, the employer may either make the severance payment immediately or may hold it in trust for a maximum period of 12 months. When the employer has held the severance payment in trust, the employer shall, immediately upon expiry of the period for which it has been held, pay the employee the sum of the severance payment plus interest at the fair market rate prevailing in the period in question. The placement of any severance pay in trust shall be subject to the provisions of section 89 regarding security from the employer.

In summary:

  1. An employee must be paid 2 weeks wages for each year of completed service after one year:
    1. It is important to note that in the case of Mahamo V Nedbank Lesotho Limited LAC/CIV/04/11, it was held that if an employee resigns, she is entitled to her severance pay even if she resigned after committing a dismissible offence; what is important is the timing. The employee must resign after committing the offence but prior to a disciplinary hearing
  2. An employee who has been fairly dismissed for misconduct shall not be entitled to a severance payment.
  3. Importantly, the calculation is made on wages at the date of termination.
  4. Where the termination of employment has been at the initiative of the employee, the employer may either make the severance payment immediately or may hold it in trust for a maximum period of 12 months. If the amount is held back, interest at the fair market rate must be paid. 
  5. General practice – when a female employee is on maternity leave the amount or period of the severance calculation is not reduced.

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:

graph

Therefore, for employees who have between 1- and 5-years’ service, the employer will contribute 4.25% each month to the Money Market Fund. This will always ensure that the contributions to the Fund will always cover the amount due of the Severance Pay. 

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. We have furnished the same advice in respect of Botswana 

Liability

The Money Market Fund arrangement, in our opinion, constitutes sound and prudent financial management where clients with no retirement fund, eliminate a liability which is often unknown or unmeasured

For current payroll clients, the employer deduction can be made each month and a third-party payment to the Fund Manager generated.

If you want assistance with this, please contact brett@axiomatic.co.za