2021 Budget Speech commentary – Employment Tax Incentive anti avoidance

Abuse in the Employment Tax Incentive (ETI) to be curbed

The employment tax incentive (ETI) was introduced in 2013 to encourage the employment of persons between the ages of 18 and 29 years, by allowing employers to reduce their PAYE liability to SARS for the first two years in which they employ qualifying employees (with a monthly remuneration of ZAR 6,500 or less). Over the past 8 years there has been a proliferation of training institutions assisting some taxpayers to claim the ETI for students who in fact never work for the employer. To curb this abuse, the definition of an “employee” will be changed in the Employment Tax Incentive Act to specify that work must be performed in terms of an employment contract that adheres to record-keeping provisions, in accordance with the Basic Conditions of Employment Act. This amendment will take effect on 1 March 2021.

Should you be concerned about your current ETI system / claims and like an experienced practitioner to cast their eye over the setup, please do not hesitate to contact us. This issue is going to be on the radar of the SARS auditors and with the number of audits being increased it would be prudent to get some professional advice before SARS visit and start asking awkward questions.

Domestic Workers and the Compensation Fund – what next to be compliant

So, what is the next step for the employers of domestic employees?

Employers are traditionally required to register with the Compensation Fund within 7 days of employing their first employee. Besides being subject to a fine for non-compliance if they don’t, employers will also be open to civil claims if an employee is injured on duty or becomes sick as a result of their employment. Interestingly enough, the 7-day rule does not apply to the current COIDA change to include domestic workers. Domestic employers have merely been “encouraged to register with the Compensation Fund without delay”. The Department of Employment and Labour will be undertaking a nationwide campaign to inform both employers and employees of the changes in legislation concerning domestics.

To register, employers must submit the following documents to the Compensation Commissioner:

  • A completed CF-1E Form (Application for the registration of the domestic worker employer)
  • Copies of the ID documents, passports, or similar form of identification for both employer and employee
  • Proof of the employer’s residential address
  • A copy of the employment contract

When will the employer be required to submit their first Return of Earnings (ROE)?

It is accepted (but not certain so there is some risk) by the Department of Employment and Labour that because of the timing of the amendments, most employers of domestic workers will miss the annual deadline for the filing of the Return of Earnings (ROE) information for the period 1 March 2020 to 28 February 2021 (ROE due by 31 May 2021). With the various roadshows and campaigns only just getting under way it is likely that the employers of domestic workers will have until March 2022 (possibly 31 May 2022) to complete and submit a ROE for the period 1 March 2021 to 28 February 2022.

How will the annual assessment be determined?

The ROE is used within a standard assessment formula to determine the annual amount payable. This assessment tariff is paid directly to the Compensation Fund which will, in the event of injury or illness, pay the employee. It is important to note that the assessment payable is an employer cost.

The COIDA amendments, applicable from 1 March 2021, list domestic workers as Class M, subclass 2500 at an assessment rate of 1.04. These assessment tariffs are reviewed on an annual basis and are subject to change.

Employers can calculate their yearly payments to the Compensation Fund by using the following ROE and assessment tariff formula:

Annual earnings divided by 100 X 1.04 = annual assessment payable.

This would imply the following contribution under different annual remuneration for a domestic worker, but at this point it is not clear as to whether there will be a minimum assessment value applicable to domestics so we cannot confirm that the table below is accurate.

Annual Remuneration Monthly Remuneration Theoretical COIDA Contribution
48,000.00 4,000.00 499.20
60,000.00 5,000.00 624.00
72,000.00 6,000.00 748.80

 

What constitutes COIDA annual earnings for ROE purposes?

The following income constitutes the COID ‘remuneration’ that would be factored into the ROE calculation mentioned above:

  • Salaries and/or Wages
  • Cost of Living Allowance
  • Bonuses (incentive or otherwise)
  • Overtime payments (regular)
  • A guaranteed 13th cheque
  • Housing Allowance
  • Commissions (only if given to an employee who also has a basic salary, and not agents or contractors)
  • Cash value of meals and accommodation provided to an employee
  • Any other payment due to an employee in accordance with the employee’s contract of service

How can we help you?

The HRTorQue team can assist you in registering your domestic, submitting the annual Return of Earnings and ensuring that the payment is made timeously. We can also assist with the sourcing of a Letter of Good Standing if necessary. We also run domestic payrolls and help employers with all compliance in this area. Please contact [email protected] if you would like any such assistance.

Domestic Workers – benefits applicable to domestic workers in terms of the COID legislation

Following a landmark ruling by the Constitutional Court, which ordered that domestic workers be included in and protected by the Compensation for Occupational Injuries and Diseases Act (COIDA), revised rules were published in Government Gazette No. 44250 on 10 March 2021.

This Gazette confirms that domestic workers will now be afforded cover by three main compensation measures as determined by the COIDA. These include:

  • Temporary total disablement, when an injured employee is booked off for four days or more by a treating doctor to recuperate from the injuries or condition. The maximum period payable is 24 months.
  • Permanent disablement lump sums, which are paid on a medical report indicating that the employee has reached maximum medical improvement, limited to 30% of the benefit.
  • Permanent disablement pensions, which use the same criteria as lump sums, but can run to 100% of a benefit payment.

Benefits, and minimum and maximum compensation limits, are based on the type and extent of an injury or disability.

The Compensation Fund will cover “reasonable” medical expenses following on-the-job incidents. If the employee requires chronic medication, as a direct result of an injury or illness contracted while at work, the Compensation Fund will cover these costs too. The Compensation Fund will also pay for assistive devices such as wheelchairs and prosthetics, along with rehabilitation, reintegration and return to work programs.

Funeral expenses are payable to dependents of a deceased employee. If the death occurred before April 2019, funeral expenses already incurred by the dependents will be refunded up to a defined maximum. For those who died after 1 April 2019, the benefit is R18,251 paid as a lump sum.

Surviving spouses will be paid compensation which includes either a once-off lump sum award or pension award. A child pension is also offered, which pays children of the deceased up until the age of 18. This pension may be extended for children who are still going to school after turning 18 years.

If there is no surviving spouse or child, a wholly dependency award may be granted to the parents or siblings of the deceased employee who were dependent on the income of the deceased employee.

The importance of the Basic Conditions of Employment Act Earnings Threshold change

On 8 February 2021, the Minister of Employment and Labour issued a notice via Gazette No. 44137 that increases the BCEA (Basic Conditions of Employment Act) earnings threshold to R211 596,30 per annum with effect from 1 March 2021.

What does the BCEA Earnings Threshold apply to?

In a nutshell, the BCEA earnings threshold governs the sections of the BCEA that regulate the hours of work. The notice states:

“… all employees earning in excess of R211 596,30 (two hundred and eleven thousand, five hundred and ninety-six rand, thirty cents) per annum [must] be excluded from sections 9, 10, 11, 12, 14, 15, 16, 17(2) and 18(3) [of the BCEA]”.

This means that employees who earn more than the BCEA earnings threshold are excluded from sections of the BCEA and are therefore not entitled to the automatic protection and rights provided by the following sections:

  • Section 9 (Ordinary hours of work)
  • Section 10 (Overtime)
  • Section 11 (Compressed working week)
  • Section 12 (Averaging of hours of work)
  • Section 14 (Meal intervals)
  • Section 15 (Daily and weekly rest period)
  • Section 16 (Pay for work on Sundays)
  • Section 17(2) (Night work)
  • Section 18(3) (Public holidays not ordinarily worked)

It is only employees that earn below the BCEA threshold that enjoy the protection of these sections of the BCEA, and for example, are entitled to overtime pay at a rate of 1.5 times the normal hourly wage rate.

Employees that earn above the threshold are precluded from these automatic protections (e.g. they are not automatically entitled to overtime).  These provisions of the BCEA must then be provided for in the employment contract.

What is ‘BCEA Earnings’?

The notice defines ‘Earnings’ to be:

“… the regular annual remuneration before deductions, i.e. income tax, pension, medical and similar payments but excluding similar payments (contributions) made by the employer in respect of the employee: Provided that subsistence and transport allowances received, achievement awards and payments for overtime worked shall not be regarded as remuneration for the purpose of this notice.”

In the BCEA remuneration is defined as “… any payment in money or in kind, …made …in return for that person working for any other person.” BCEA remuneration is a complex subject and is not discussed in this article.

In short, excluded from BCEA remuneration are:

  • Allowances
  • Benefits that are not granted in return for ‘work done’ (in other words, benefits that are granted in return for ‘work done’ are BCEA remuneration).

“… before deductions…”

This part of the definition specifies what could be termed ‘gross’ remuneration i.e. remuneration before deductions, but the wording starting from “but excluding” is clumsily drafted and easily misinterpreted. It is clear that remuneration is not reduced by employment taxes (PAYE, SDL and UIF), and employee-paid contributions to medical schemes, retirement funds ,etc.

What is not clear is that the wording following “but excluding” appears to specify that remuneration must also be reduced by employer-paid contributions to medical schemes, retirement funds etc. This is not correct -employer-paid contributions to medical schemes, retirement funds ,etc. must be included in BCEA remuneration.

The Department of Employment and Labour has confirmed this by kindly providing the PAGSA with their interpretation that states that employer-paid contributions to medical schemes, retirement funds, and similar, are BCEA earnings and the value of the amount contributed must be included.

“… subsistence and transport allowances…”

As pointed out above, all allowances are excluded by definition from BCEA remuneration.  However, to reduce queries and prevent misunderstandings, the notice specifically excludes two commonly used allowances that in tax law have special tax rules, being the subsistence allowance and the travel allowance.

“… achievement awards…”

For the purpose of the notice, ‘achievement awards’ are not BCEA earnings, and include:

  • Bonuses
  • Commissions
  • Incentive payments, etc.

“… overtime …”

As stated above, only employees earning below the threshold are subject to the provisions of BCEA section 10 that provides the overtime rules.

This means that if an employee works overtime and earns –

  • Below the threshold, then the overtime must be paid by the employer,
  • Above the threshold, then the overtime may be paid (the employer can choose whether or not to pay).

In the past, when calculating the value of an employee’s BCEA earnings, only ‘occasional’ overtime was excluded from BCEA earnings, a nonsensical requirement.  How does one decide which overtime hours are ‘regular’ and which are ‘occasional’? Overtime is an irregular (or occasional) payment by nature.

The PAGSA submitted comments on this impractical requirement for many years until finally the wording in the notice was changed to what we have now – all overtime payments are excluded from BCEA earnings.

So where else would a change to the BCEA Earnings Threshold have an impact?

The BCEA earnings threshold impacts on the LRA (Labour Relations Act) and the EEA (Employment Equity Act). These impacts are:

Labour Relations Act

Employees that earn above the earnings threshold:

Are not subject to the LRA provisions that deem casual workers and employees placed by labour brokers who are not performing a temporary service, to be employees of the client.

Fall outside the scope of the LRA provisions relating to fixed-term employees who are deemed to be employed indefinitely after three months (in the absence of justifiable reasons for fixing the term of the contract).

Employment Equity Act

An employee who earns above the earnings threshold and who has a dispute under Chapter II of the EEA (unfair discrimination) is not permitted to refer the dispute to the CCMA for arbitration (unless the dispute relates to alleged unfair discrimination on the grounds of sexual harassment, or the parties agree to arbitration) and is obliged to refer the dispute to the Labour Court for adjudication.

Should you require any assistance with the interpretation of this legislation or its impact on your business please do not hesitate to contact our HR Team.

Use of Polygraphs by Employers – a word of caution

Employers, particularly those that are in high risk industries such as the security sector, often use polygraphs or the “lie detector test” to ascertain an employee’s truthfulness.  Many businesses have incorporated the necessary permissions to utilise the test as a standard part of their employment contract and an obligatory polygraph test is performed as common practice during the on-boarding process. In this category of use as a support tool to combat crime in the workplace, the polygraph can play a significant part in decreasing business risk and discouraging misconduct as well as curbing incidences of economic crime.

A polygraph test can best be described as a tool in the “truthfulness” toolbox that the employer has access to.  In South Africa there is no legislation that governs the use of the test.  The Constitution upholds a person’s right to not be compelled to take the test unless they consent to it.

Prior to a test being performed:

An employee must consent in writing to the test and must also be informed of the following:

  • The examination is voluntary.
  • Questions to be used in the polygraph must be discussed prior to the test.
  • The employee may request an interpreter should it be necessary.
  • The person undergoing the test has the right to have another person present during the test. That person may not interfere with the test at all.
  • No abuse of the circumstances is permitted.
  • No discrimination is allowed.
  • No threats or bullying is allowed.

An employer is permitted to use a polygraph to investigate a specific incident.

  • The employee being investigated must have had access to property where the incident occurred.
  • There is a reasonable suspicion that the employee was actually involved.
  • There has been an impact to the employer’s business in terms of loss or injury.
  • The employer is seeking to establish honesty where this would be relevant to the business incl. establishing fraudulent behaviour in the Company.
  • The employer is verifying abuse of alcohol or other substances whilst an employee is on duty.

The polygraph test is inadmissible in court or at CCMA as evidence of guilt, the reason being that the test is not viewed as having the capacity to verify the falsity of a statement. The machine can only detect physiological changes to a person’s blood pressure, heart rate and perspiration response. Whilst voice stress analysis can also be used and this can be a significant indicator that someone is deceitful, there may very well be other reasons that certain stresses are recorded.

An example of this would be a polygraph test where this was conducted on an employee relating to the theft of money in an office. The question asked was “did you steal the money?” The answer was “no” and deception was indicated due to the recorded physiological changes to the person taking the test.  On investigation into this particular case it was found that the employee had left the office without permission and the theft had occurred in their absence; the stress noted on the polygraph was due to the fear of being found out that they had in fact left the office early without permission. This was subsequently discovered whilst checking CCTV footage.

South African courts and CCMA have accepted that a polygraph cannot prove guilt; it can merely reflect that deception is indicated.  If an employer fails to adhere to the rules relating to polygraphs this may well prejudice the case of an employer to prove guilt of an employee and if the employer subsequently acts on that information and institutes disciplinary processes or dismisses them, they could lose their case unless they have a decent raft of other evidence in support of the polygraph results.

The right to fair labour practices is built into South African labour law and included in that is the right to respect and dignity. In addition everyone has the right to privacy and freedom which includes the right to physical security.

Unauthorised use of a polygraph test would flout those rules and could potentially land an employer in hot water as was recently demonstrated in the CCMA case of a supermarket guard who was dismissed for failing a voice stress analysis test with his employer, (Mahlangi vs Corporate Investigating & Veracity Assessment (Pty) Ltd).

In the employment contract there was a pledge stating that it was an inherent requirement of the conditions of employment that the employee had to pass the test successfully. Following incidents of theft at the supermarket, tests were conducted on a number of guards; the employee failed the test and was dismissed.  This was in breach of the Labour Relations Act and the Constitution and was unlawful; the arbitrator stated that the guard should instead have been given a hearing and any other corroborating evidence the employer had should have been presented at that time.  The reliance solely on the testing system was considered unreliable.

The Commissioner found that the test alone could not justify termination of employment as a polygraph test or voice stress analysis test was inadmissible as guilt.  This would mean the guard had been dismissed on a suspicion alone and this was both procedurally and substantively unfair. Compounding this case, the employer had tried to engage the employee in a mutual termination contract after the fact.  The employee had continually declared his innocence.

The Commissioner awarded the employee a full year’s salary as recompense.

TERS vs Reduced Work Time Benefit

UIF Covid-19 TERS

On the 28th February 2021 employers were sent correspondence from UIF regarding the extension of the TERS benefits. These benefits were extended from 16th October 2020 until 15th March 2021 but only certain categories of employees are eligible for this benefit.

These include

  • Employees who are on temporary lay-off or Reduced Work Time within those sectors that have not been able to operate due to regulatory restrictions. These business sectors are specified in Annexure A of the New Directions and include businesses directly involved in hospitality, tourism, liquor, some sectors of Arts, entertainment and recreation and certain businesses included as part of the supply chain to the aforementioned sectors.
  • Employees in all sectors who:
  1. Were required to self-isolate or quarantine to prevent the spread of COVID-19
  2. Are age 60 or above and who could not reasonably be accommodated in the workplace
  3. Have co-morbidities and who could not reasonably accommodated in the workplace

The online portal is open to accept claims for employees list in section 1 above for the period 16th October 2020 until 31st December 2020 ONLY. UIF will communicate on the opening of the other claim codes and the period 1st January 2021 until 15th March 2021.

Reduced Work Time Benefits

In light of the extended UIF TERS benefit period, employers in the sectors targeted for relief will have the opportunity to apply for the TERS benefits.

For those sectors unable to claim TERS, employees could make use of the Short Term/Reduced Work Time Benefits.

The Reduced Work Time covers employees whose working hours have been reduced or who are forced to stay at home due to work stoppage.

Normally, a claim for this benefit is submitted by an employee with the assistance of the employer. However, the system has apparently been enhanced to enable employers to submit bulk applications on behalf of employees and a spreadsheet has been designed to make this easy for employers.

The differences between TERS and Reduced Work Time Benefits are:

  • The Reduced Work Time benefit uses, and then reduces, the employee’s “credit days”. These days are then no longer available to the employee to increase the value of unemployment benefits at a later stage.

The TERS benefit does not use or reduce “credit days”. The value of the RWT benefit is, in almost all cases, less than the value of the TERS benefit.

Employment Services Bill – Discussion around regulating the employment of foreign nationals

The government have published a bill for comment, the Employment Service Bill. The Bill is available at this link.

In the bill the government proposes to regulate the employment of foreign nationals and includes some of the following recommendations:

  • an employer must confirm that there are no suitable South African citizens that can be employed in that position, prior to recruiting a foreign national
  • requiring that an employer must prepare a skills transfer plan in respect of any position in which a foreign national is employed
  • the identification of certain sectors and target setting for South African citizens within these sectors;

While we recognize that unemployment is a crisis in our country, we strongly believe this is not the way to go. It once again emphasizes a belief that government have that central planning works despite international evidence to the contrary (or even the failures evident during through the Covid disaster management process).

Hopefully common sense will prevail.

Effective Virtual communication for continued productivity: Employer to Employee

The COVID-19 outbreak is one that has forced business owners and employers to think outside the normal communication channels they have always used. More and more companies find that they need to virtually run their business with a lot of communicating having to be done virtually as well. A clear communication strategy has become critical during these times to ensure that employees remain as engaged as possible.

There are 3 basic principles employers should usually adhere to:

  • Transparency,
  • Compassion and
  • Ownership

The question then arises, what more/ what else can businesses do to effectively manage Employer-Employee communication in a virtual world?

  • Check in often

As an employer check in with your team as often as possible. This may be formal or informal as you show employees that they matter outside of work.

  • Keep messaging clear and consistent

When communicating as an employer, do not give mixed messages or content. Always remain honest and consistent in the message to employees. Apart from good communication practices, this ensures employees are clear on what an organization is doing and how they hope to survive during these perilous times.

  • Communication must flow both ways

Allow employees to communicate their fears, challenges, ideas, and accomplishments during one-on-one virtual meetings or team meetings. Have safe online channels of communication that address the different issues surrounding the pandemic and how it affects different individuals’ productivity.

  • Eliminate micromanagement

In an office environment, management often manage hours logged, emails sent, and meetings scheduled. In a virtual team things are different. Management should nurture communication between team members to focus on managing results as opposed to managing tasks. Communicate benchmarks and deadlines to gauge effectiveness and productivity of individuals.

  • Communicate a greater sense of purpose

Purpose is one of the most significant guiding principles of a leader. In “The Heart of Resilient Leadership”, Deloitte Global CEO Punit Renjen noted the vital role that purpose plays in fostering an engaged workforce and that employees feel a greater connection to the work they are doing each day when their companies are focused on an authentic purpose.

  • Digital transformation

To further empower the workforce and maximize productivity, leaders should consider new technologies as well as digital ways of working and collaborating to improve productivity and engagement while preserving security and flexibility.

Careful, just because you aren’t aware of payroll issues, doesn’t mean they aren’t there

In our experience CEOs, CFOs and HRDs are largely oblivious of the payroll details within their organisations. It is not a key operational area; it is perceived as an admin process; and they largely assume that if they don’t hear anything then it must be fine. When they do get involved in payroll issues they are often confronted with the “Don’t worry, we’ve always done it this way”. The problem is that, particularly in South Africa, payroll is becoming increasingly important for several reasons:

  • If you get it wrong it can result in “downed tools” and work stoppages;
  • Employees predominantly work to be paid. If you don’t get this right then they don’t feel valued and productivity drops. It is also the primary cause for dissent within the organisation;
  • Payroll in South Africa is complex;
    • Payroll is the central hub for thirteen different pieces of legislation (often ones which tend to disagree with one another);
    • Payroll is where the money is and is the target for audits from SARS, the Department of Labour, Compensation Fund and disgruntled employees;
  • Very few payroll departments can keep up to date with all the legislative changes;
    • Payroll departments tend to lurch from one payroll deadline to another with little time in between to keep up to date with legislation and best practice;
    • Payroll departments are over reliant on payroll systems. They seldom understand how packages are put together and what the impact of changes are;
  • Payroll systems are creaking. Given the complexity and the multiple “grey” areas in legislation, payroll software developers are increasingly pushing the onus on clients to make sure they are compliant without clients realizing this is happening;

One of the biggest issues we see is inherited problems where a process worked once, but was never reviewed as systems change. Over the years 10 years of being a payroll consultant, I have encountered several instances where these inherited problems have resulted in huge penalties from SARS, significant costs to fix, and a lot of dissatisfaction from employees.

A scenario that springs to mind: An employer was processing medical insurance as a proper medical aid allowing employees to incorrectly claim for tax credits. This went on for at least two years. A seemingly small thing, but ultimately it cost the employer significant amounts of money:

  • The cost to fix:
    • Correction and resubmission of all employee tax certificates
    • Resubmission of all EMP201s and EMP501s
    • Consultation with employees to recover the tax credit benefit they received in error – not to mention the employee unhappiness and lack of trust that resulted
  • Having to foot the bill for employees who were no longer employed
  • Penalties and interest from SARS for ‘late’ declaration and payment

Whether your payroll is processed in-house or outsourced it is advisable to have regular independent reviews of your payroll and the processes to mitigate against costly scenarios like the above.

We recommend a review at the following times:

  • Annually when tax legislation and tables change;
  • When you change key payroll personnel; and
  • When you change payroll supplier or software

These reviews highlight legislative and internal processes shortfalls. We also offer review and support during the transitioning periods of new payroll personnel and when migrating to new payroll software.

Employer’s ability to recoup training costs

Employers will in the course of employment spend money and time on the development of their employees. This development can range from new employees being assigned work buddies or the employee being enrolled on specialised courses or further tertiary education. The actual cost to the employer can be expensive.

This often places employers in a difficult situation when the employee decides to leave their employ, as the employee has acquired skills at great expense to the current employer and then leaves to ply their trade elsewhere.

The question is now: what do we do? We have spent all this money, time, and considerable effort, and on the face of it, the employee simply walks away with the skills acquired at the current company with seemingly no recourse?

In the case of the National Health Laboratory Service v Janse van Vuuren, the employer employed the employee on the basis that the employee would work for them and study. One of the terms of the contract of employment was that if the employee did not remain in employment for a period of two years after the completion of the training and qualification as a specialist, she would reimburse the plaintiff for her training costs. When the employee resigned in 2010, the employer successfully sued her to recover such costs – the employer valued the amount to be paid at R2 million. The court had to decide on the damages the employer suffered.

The employer did not sue based on contractual breach, but based on penalty, and the court had to rule on the fairness of the amount claimed. The company used the provisions of the Conventional Penalties Act 15 of 1962.

The court found that it was fair, just, and equitable that the penalty stipulation be moderated and reduced, to correspond with the actual training costs incurred by the employer. The penalty was then calculated as being R1,630,445 (R1,63m). The employer was entitled to be paid that amount as well as accumulated interest.

The critical element for employers is the importance of having the training stipulated in a contract with the employee and preferably for the employer to include a fair repayment term.

It is also important to recognise that the actual training cost is not only the direct cost of the course itself and could include:

  • time-off
  • long study leave
  • sabbaticals
  • specialised mentoring and coaching and / or management support
  • travel
  • research projects

Should you require any assistance with the drafting of such clauses or training agreements, please contact us on [email protected].