Article by Maletsie Letsie (Labour Inspector- Industrial Relations Section)
SEVERANCE PAY
AN employment relationship is bound to end; either at the initiative of an employee or an employer but it is important to give an employee benefits he/she is entitled to. Severance pay, provident fund and notice pay are some of the many entitlements post-employment (when one is no longer with a certain employer and in most cases unemployed).
All over the world severance pay programs exist. Severance pay is provided in a form of cash to employees who voluntarily or involuntarily leave work. The payment is usually related to the number of years worked with the same employer and it is linked to the last salary of an employee (Holzmann & Vodopivec, 2012). According to Holzmann & Vodopivec (2012), historically there are three main determinants of severance mandates around the world: the creation of broader labour codes, early industrial restructuring and spells of high-level unemployment in the interwar period, and the welfare state after the World War 2. These historic events may not have been of any significance to Lesotho but legislation seems to have arisen by copying the colonial powers’ labour codes and social security systems. History tells us that Lesotho was colonized by Great Britain and before Lesotho’s independence most legislation was borrowed from the Great Britain and that has had an effect on legislation post-independence. A lot of labour laws were enacted post-independence which ultimately led to the creation of the Labour Code Order No. 24 of 1992 which in essence has also lost its momentum due to the evolving nature of the world of work brought about by factors such as globalization.
Severance pay is one of the many social security systems globally. Holzmann & Vodopivec (2012) show those elements for the emergence and persistence of severance payments were the technological changes of the late 1800s and the large scale unemployment of the Great Depression in the 1930s. Severance pay was used as a form of security in the event of dismissal. Lesotho does not have numerous social security mechanisms dealing with employees who have voluntarily/involuntarily left their jobs and thus far severance pay is the widely used form of security by the private sector and sometimes the public sector for employees not governed by the various government commissions. Section 79 of the Labour Code Order No 24 of 1992 explains that an employee is entitled to severance pay after continuous employment of over one year with the same employer and should be equivalent to two weeks’ (90hrs) wages for each completed year of continuous service with the same employer.
As it has been mentioned above, an employee is entitled to severance pay when he/she has been continuously employed for over a year with the same employer and the reason for termination of employment is not misconduct. An employee who is dismissed from work due to misconduct is not entitled to severance pay. However, an employee should be afforded a fair hearing to establish whether indeed there has been misconduct. The audi alteram partem principle should apply.
The idea behind severance pay is to better one’s life post-employment. Therefore, if there is a scheme that offers better cash rewards post-employment, it is advisable for an employer to use it instead of severance pay. However, for the scheme to be operational an employer has to apply for exemption in the Labour Commissioner’s office and after thorough consultations (involving the employer and employees) the Labour Commissioner can grant the exemption. This is reiterated in the following case: Seeiso Leche Vs Telecom Lesotho (Pty) Ltd LAC/REV/26/09. To summarize the case: Leche wanted severance while the respondent was of the view that the company was exempted by the Labour Commissioner from paying severance. It turned out that the Labour Commissioner did not afford employees an opportunity to voice their concerns on the issue of exemption and failure to consult employees meant that the audi principle did not apply therefore Leche was awarded severance pay. Emphasis on exemption appears in Section 79 (7) of the Labour Code (Amendment) Act 1997 which stipulates that “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.”
Calculation of severance pay has always been the crux of the matter for both employees and employers. It is important for these two parties to know how to calculate severance pay so that both parties do not feel cheated when doing their transactions post-employment. Severance pay is calculated in the following manner:
(Salary× 90hrs×number of years worked)÷195hrs= severance pay.
An example:
(M2000×90hrs×8yrs)÷195hrs=M7384-62.
It is worth noting that according to Section 79 (5) of the Labour Code Order No. 24 of 1992 when termination has been done at the initiative of an employee, the employer may pay the severance immediately or hold the severance in a trust for a period not exceeding 12 months. The understanding is that upon expiration of the 12 months the employer will give the employee the severance pay with interest.
It is an employee’s right to get his/her severance pay post-employment if he/she deserves it. It is still a problem as to what happens if an enterprise is unable to make severance payment owing to insolvency.
PROVIDENT FUND
Provident Fund (PF) is another form of a social security system. Severance pay as a form of social security was discussed earlier. There is no provision for PF in the Labour Code but that does not deter an employer from providing PF as an alternative to severance pay for his/her employees. There are numerous establishments in Lesotho which use PF. However, for PF to be operational in any establishment an employer has to apply to be exempted from the severance pay system in the office of the Labour Commissioner. PF can be labelled as a modern social security system in Lesotho because traditionally severance pay system was the only predominant system operational in the private sector.
The main objectives of any social security system are consumption smoothing over an individual’s lifetime, insurance, income redistribution for society as a whole, and poverty relief (Asher, 2010). PF actually acts as an insurance and relief from poverty post-employment. PF is essentially a savings scheme and good savings enable individuals to live better post-employment. PF contributions are typically by employers and employees. Lesotho has not yet reached a pinnacle where government contributes towards PF but one would like to see Lesotho government contributing towards PF in future.
Traditionally, social protection systems have been based on employer-employee relationships and extending their coverage to the informal sector will require innovative approaches (Asher, 2010). The informal sector in Lesotho has been abandoned for a long time with most of our legislature not covering it. Lesotho is a member state of the United Nations and goal 8 of the 2030 Sustainable Development Goals (SDGs) focuses on decent work for all. Lesotho has the responsibility to ensure that by 2030 it achieves the SDGs agreed upon by member states. In that regard Lesotho has to ensure that the informal sector is covered/protected by legislature to ensure decent work for all in all sectors of the economy. This simply means that PF could be extended to the informal sector.
It is therefore crucial for Lesotho to design unemployment benefits that would add value to peoples’ lives. Thus far one can only mention PF and severance as the only unemployment benefits in Lesotho. It is therefore Lesotho’s duty to reform its unemployment benefits. According to Robalino (2014) in reforming unemployment benefit systems, the policy debate should be on the appropriate level of benefits, the subsidies needed for people who cannot contribute enough, and how to finance the subsidies, rather than on whether unemployment insurance or individual unemployment savings accounts are better. Policy makers should focus on better work incentives and better protection. The question would be, does severance and PF offer better work incentives and better protection? Taking into account the fact that one gets no severance if he/she is dismissed from work due to misconduct irrespective of the tenure of his/her employment. Regarding PF, one only gets his/her contribution if he/she has been dismissed due to misconduct (minus employers’ contribution).
Advantages of unemployment benefits (Robalino, 2014):
- Unemployment benefits can help individuals find better jobs than when there is no insurance.
- Unemployment benefits can support aggregate demand in times of crisis.
- Unemployment insurance can lead to more income redistribution and better protection of workers.
- Individual savings accounts can improve incentives to search for jobs because savings that are not used to finance unemployment benefits can be used to finance investments or higher pensions.
Moving forward it is crucial for employees (Trade Unions), employers (Employers’ organizations) and Government to further their conversation on unemployment benefits because protection is necessary. It is worth noting that Ministry of Labour and Employment is in the process of drafting a Social Security Bill therefore the conversations should never stop.
Notice pay
An employee qualifies for notice when termination is not due to misconduct. Termination done by either the employee or employer warrants either party to give notice to make the other party aware that the employment relationship is going to come to an end at a certain date. Notice gives both the employer and employee time to psychologically deal with the eminent loss that is about to happen. It helps an employer find ample time to look for a substitute so that his/her business production may not be affected. It also helps an employee find alternative means to employment while anticipating ending of the employment relationship. Sections 63-65 of the Labour Code Order No. 24 of 1992 deliberate more on notice. However, it is vital to point out that an employment relationship of less than six months warrants one week notice, an employment relationship of more than six months but less than a year warrants two weeks’ notice, and finally an employment relationship of over one year and above warrants one month notice. The burden of payment lies with the party that initiates termination of an employment relationship where notice is not given.
Calculating notice pay:
(Monthly salary ×8hrs or 9hrs× number of notice days)÷ 195hrs= Notice pay.
N.B The calculation uses 8 hours or 9 hours because some employees work 8 hours and others 9 hours per day in order to fulfill the 45 hours week as stipulated by the Law.
Examples:
- One week notice
(M2000× 8hrs× 7days)÷195hrs= M574
- Two weeks’ notice
(M2000× 8hrs× 14days)÷ 195hrs= M1149
- One month notice
An employee whose salary is M2000 per month will get an equivalent amount for his/her notice pay, which is M2000.
References:
Asher, G, M. 2010. Pension Plans, Provident Fund Schemes and Retirement Policies: India’s Social Security Reform Imperative. ASCI Journal of Management 39(1). India: Administrative Staff College of India.
Holzmann, R, & Vodopivec, M. 2012. Reforming Severance Pay: An International Perspective. Washington: The World Bank.
Robalino, A, D. 2014. Designing unemployment benefits in developing countries. [wol.iza.org]
Labour Code (Amendment) 1997.
Labour Code Order No. 24 of 1992.
