Leave Pay, Notice Pay and Severance Pay – common calculation mistakes

Pay for leave, notice and severance is an area many employers don’t always get it right.

The calculation of these payments is covered by s35(5) of the Basic Conditions of Employment (BCOE).

The following payments are included in an employee’s remuneration for the purposes of calculating pay for annual leave in terms of section 21, payment instead of notice in terms of section 38 and severance pay in terms of section 41 –

  1. Housing or accommodation allowance or subsidy or housing or accommodation received as a benefit in kind;
  2. Car allowance of provision of a car, except to the extent that the car is provided to enable the employee to work;
  3. Any cash payments made to an employee, except those listed as exclusions in terms of this schedule;
  4. Any other payment in kind received by an employee, except those listed as exclusions in terms of this schedule;
  5. Employer’s contributions to medical aid, pension, provident fund or similar schemes;
  6. Employer’s contributions to funeral or death benefit schemes.

The following items do not form part of remuneration for the purpose of these calculations –

  1. Any cash payment or payment in kind provided to enable the employee to work (for example, an equipment, tool or similar allowance or the provision of transport or the payment of a transport allowance to enable the employee to travel to and from work);
  2. A relocation allowance;
  3. Gratuities (for example, tips received from customers) and gifts from the employer;
  4. Share incentive schemes;
  5. Discretionary payments not related to an employee’s hours of work or performance (for example, a discretionary profit-sharing scheme);
  6. An entertainment allowance;
  7. An education or schooling allowance.

The value of payments in kind must be determined as follows –

  1. a value agreed to in either a contract of employment or collective agreement, provided that the agreed value may not be less than the cost to the employer of providing the payment in kind; or
  2. the cost to the employer of providing the payment in kind.

An employee is not entitled to a payment or the cash value of a payment in kind as part of remuneration if –

  1. the employee received the payment or enjoyed, or was entitled to enjoy, the payment in kind during the relevant period; or
  2. in the case of a contribution to a fund or scheme that forms part of remuneration, the employer paid the contribution in respect of the relevant period.

This schedule only applies to pay for annual leave accrued from the date of operation of this Schedule.

If a payment fluctuates, it must be calculated over a period of 13 weeks or, if the employee has been in employment for a shorter period, that period.

A payment received in a particular period in respect of a longer period (e.g. a thirteenth cheque) must be pro-rated.

This Schedule only applies to the minimum payments that an employer is required to make in terms of the Basic Conditions of Employment Act, 1997.”

When the legislation was initially introduced in 2004 we held seminars and sent many emails about the changes in the BCEA legislation and Section 35(5), but we have noticed that a number of organizations still have not worked through these changes and we believe that a number of companies do not calculate Notice pay, Severance Pay, Leave Pay paid out on termination or Leave Pay (while on Annual leave) correctly.

Many still pay Notice pay, Severance pay, Leave pay paid out on termination or Leave pay (while on Annual leave) using only the basic wage or salary, perhaps correctly, but without any consideration of the change in legislation. This could lead to their actions being found to be irregular by the Department of Labour.

HRTorQue Outsourcing has recently dealt with labour cases where disputes as to the value of leave pay has not only cost the client a significant amount of money in terms of legal and consulting costs but also led to the employer settling on a value that exceeds that legislatively prescribed.

 

What should you as an employer do?

By taking a few easy steps you can mitigate most risk in this regard.

  • Utilise the services of an external consultant – this shows the company has endeavoured to interpret and apply the legislation taking into account the specifics of its own organisation. This significantly reduces the risk of non-compliance.
  • Follow a process and document your decision making

This legislation is however quite complicated and can result in an increase in payroll bills if a proper documented process is not followed. The basis of this action will include a decision to include or exclude certain allowances and an explanation as to why that decision was made. We advise that you make an appointment with David Beattie of HRTorQue Outsourcing by contacting him via email at [email protected] Dave will send you a quotation covering the process that will be taken to get you through this process, with the output being a recommendation on whether or not to change your payroll calculations.

 

What process do we follow?

The process that will be followed during this consultative exercise is as follows:

  • Consultation to introduce Section 35(5) of the Basic Conditions of Employment Act
  • Identification of various cash payments, allowances, company contributions and fringe benefits
  • Separation of income categories into income payments for ‘work done’ and ‘to enable work to be done’. This is an important step in the process.
  • Identification of payments that are specifically excluded in terms of this legislation
  • A report consolidating the process, findings and decisions made.

The outcome of this consultative process (the decision table) will be implemented into the payroll if you are an HRTorQue Payroll client

Where the employer would like a remuneration policy detailing the company’s treatment of leave payments, one will be drafted by a representative of HRTorQue Outsourcing’s HR Department. The cost of this policy will be quoted on separately.

Draft code of good practice – violence and sexual harassment

A draft code of good practice on the prevention and elimination of violence and harassment in the workplace was published in the Government Gazette on the 20th of August and all interested and affected parties such as employers, employees, employee organisations and trade unions are invited to comment within 60 days.

The draft policy falls within the ambit of the Employment Equity Act and covers a wide range of undesirable behaviour falling within the scope of Violence and Harassment in the workplace.  This includes sexual harassment, bullying including cyber bullying and threats of on-line violence, intimidation, threats of violence and harassment in a number of areas focusing on racial, ethnic or social issues or threats to whistle blowers or gender or LGBT violence or harassment.

The code applies to all sectors, public and private, formal and informal and any place that could be defined as an area of work.  Any areas outside of a workplace that are governed by the process of work would be included, i.e. travel, rest areas, outside training, even commuting to and from work or accommodation provided by an employer.

The employer would also be responsible for a safe on-line and communications environment and would need to control harmful behaviour or practices conducted in these spaces.

 

From the Draft Act;

Sexual Violence and Harassment: defined as directly or indirectly engaging in conduct that the perpetrator knows or ought to know is not welcome, is offensive to the complainant and makes the complainant feel uncomfortable, interferes with work, causes harm or inspires the reasonable belief that harm may be caused to the complainant or a related person.

Racial Violence and Harassment: is defined as unwanted persistent conduct, or a single incident which is seriously degrading, humiliates or creates a hostile or intimidating environment, or is calculated to influence submission by actual or threatened disadvantageous consequences, and which is related to a person’s membership or presumed membership of a group identified by one or more of the prohibited grounds or a characteristic associated with such group.

All conduct either verbal or non-verbal of a racist nature whether through remarks, abusive language, name-calling, offensive behaviour, gestures or cartoons, memes or insinuations are considered undesirable.

Most of the practices listed and defined by the Draft Act fall within the generally accepted scope of “Good Practice” in a work place and are not new to most employers as the principles should be dealt with in their existing Code of Conduct policies.  The draft has sought to define and label definite practices which are abhorrent and unacceptable in a modern work setting if compared to what a reasonable person would accept as normal and appropriate behaviour.

 

How does this affect the employer?

Employment Equity Committee and Policies

The Draft Act is being proposed as an amendment to the Employment Equity Act and as such employers must look to their employment equity managers and committees to ensure that these items are addressed on their agenda at meetings and incorporated into their employment equity plans and policies.  Conclusions, minutes and resolutions relating to employment equity policies should be made available to all employees to view.

Every effort should be made by employers to ensure measures are put in place to actively prevent an environment developing where violence or harassment is tolerated.  Establishing a workplace culture of respect, dignity and inclusion for all individuals is required and expected.

 

Company Policies

The principles defined in the Act will reach across many Company Policies and Procedures that may already have been created and accepted in an Organisation.  We suggest that these are scrutinised and revised so that once the Act is accepted into law there is no scramble to become compliant.

Policies that may need revision would be the Company Code of Conduct, Dress and Ethics Policies, Language Policy, Racial Harassment Policy, Occupational Health Policies and On-line Systems User Policies.

Contracts of Employment should be reviewed to ensure there is no racial or gender bias in the documents.

Prevention and Awareness Programmes should be introduced:

The Draft Act encourages Organisations to develop a culture of dignity and respectful engagement between employees as well as between employer and staff.  This may take effort and it could be helpful to engage outside specialists to offer training and programmes that increase awareness of Violence and Harassment issues whether they are sexual or racial as well as establish guidelines of acceptable behaviour and practices in the workplace.

It is the employer’s duty to provide relevant information, instructions and training where necessary to ensure there is a safe working environment, free of risk to health whether physical or psychological, in a manner which is dignified, protected and respected.

Treatment, Care and Support of Victims:

The employer should establish a protocol or guideline for the treatment and care of a possible victim within an Organisation.  Should there be an incident of sexual, racist or violent harassment within the workplace it is important that everyone has guidelines that are clear on the interventions required in terms of their Workplace Occupational Health and Safety strategy.  Employers and employees are jointly responsible for creating a healthy workplace.  Appropriate referrals for counselling and other interventions must be communicated.

Privacy, Consent and Record-Keeping of Personal Information:

Employers and workers must ensure that complaints procedures and disciplinary issues are kept private and the rights of the affected parties are protected.  Records must be kept in a safe and secure place and consent must be acquired before sharing personal information.  A privacy policy should already be in place for the Organisation.

Procedures in Managing Violence and Harassment:

Employers must develop clear procedures to deal with Violence and Harassment.  These can form part of the Company’s normal disciplinary code.  Steps must be taken to clearly communicate to employees that they can report incidents to managers or human resource departments and these complaints will be dealt with swiftly and thoroughly and should the incident be of a serious nature there will be attention given to the well-being of the employee through counselling interventions, appropriate privacy provided and disciplinary procedures for the perpetrators.

A culture that encourages freedom to report or discuss sexual, racial or other types of bullying and harassment must be maintained and an employee should be aware that if an incident occurs it would not be trivialised or ignored.

Monitoring and Evaluating Practices:

Employers need to design and implement strategies, policies and programmes to eliminate Violence and Harassment, by identifying key elements to create a monitoring and evaluation system.  The system or mechanism created is intended to be a collaboration between employer and employees to track implementation and ensure there is an informed response.  These mechanisms and evaluation strategies must consider national efforts to eliminate Violence and Harassment in broader society.

Challenges for Employers:

The Draft Act speaks to cultural development within Organisations and this is in line with fresh impetus by Government to promote a more equal and dignified society where behaviour that could be labelled as demeaning or threatening is stamped out and recognised as having no place either in the work place or society in general.

Very often an employer may find themselves in a position of addressing particular behaviour patterns from employees that would fly in the face of what would be considered appropriate.  It is often difficult to identify this, but it is up to the employer to recognise and take heed of warning signs that there may be something amiss and act timeously to prevent an incident from developing.

A culture of decency develops where appropriate behaviour is encouraged and learnt by an employee who is observing it continuously from employers and management.  Ignoring Violence and Harassment can have major negative consequences for an Organisation that they may be ill-equipped to deal with both financially and from a marketing or PR perspective.

Domestic workers included in new COID Bill

On 10 September 2020 the Minister of Employment and Labour introduced the Compensation for Occupational Injuries and Diseases Amendment Bill to Parliament. Most noticeable of the amendments is the change to the existing definition of an “employee” to include (as opposed to exclude) domestic workers. Currently, domestic workers and gardeners are not included in the definition of an employee in the COID Act and can only claim against the Unemployment Insurance Fund.

While it is nice to see this from an equity perspective, we are concerned with the practical implementation of this change. It is unlikely domestic employers will be able to manage the challenges dealing with the compensation fund nor will the Compensation fund be able to manage the additional 5 million new employers that would need to be included. Most likely this is going to result in further tension between employers and employees…

To view the Bill, follow the link.

Watch out – new potential rights and powers for SARS

The government in August published the Draft Taxation Laws Amendment Bill (TLAB) and Draft Tax Administration Laws Amendment Bill (TALAB) for comment.

There is a lot of information in these Bills including (source gov.za):

Key tax proposals contained in the 2020 Draft Rates Bill include the following:

  • Changes in rates and monetary thresholds to the personal income tax tables
  • Adjustment of transfer duty rates to support the property market
  • Increases of the excise duties on alcohol and tobacco

Key tax proposals contained in the 2020 Draft TLAB include the following:

  • Proposed introduction of export taxes on scrap metals
  • Tax measures required as a result of the modernisation of the foreign exchange control system
  • Aligning the carbon fuel levy adjustment with the Carbon Tax Act
  • Allowing a carbon tax “pass through” for the regulated liquid fuels sector
  • Addressing an anomaly in the tax exemption of employer provided bursaries
  • Clarifying rollover relief for unbundling transactions
  • Consequential amendments as a result of 2019 changes to section 72 of the VAT Act

Key tax proposals contained in the 2020 Draft TALAB include the following:

  • Amendments enabling the proposed introduction of an export tax on scrap metals
  • Removal of the requirement to prove intent with regard to certain offences listed in the Fourth Schedule to the Income Tax Act, the Value-Added Tax Act and the Tax Administration Act
  • Refusal to authorise a refund where returns are outstanding under the Skills Development Levies Act and the Unemployment Insurance Contributions Act
  • Withholding of a refund pending a criminal investigation
  • Estimated assessments where relevant material requested by SARS has not been supplied

We note with particular concern two of the proposed amendments:

  1. the proposed amendment to the TALAB to “Remove the requirement to prove intent with regard to certain offences listed in the Fourth Schedule to the Income Tax Act, the Value-Added Tax Act and the Tax Administration Act”.
  2. The proposals around limiting refunds being paid where returns are outstanding (UIF, SDL, Income Tax).

The reason we are concerned is because we have already seen how difficult it can be for taxpayers to get a refund. Now we are once again seeing legislation that will potentially make refunds harder. Further, it is of major concern that it is proposed the words “wilfully and” be removed from the Income Tax Administration Act. Previously it was up to SARS to show that the taxpayer had shown a wilfull intent before a criminal indictment could be followed. Now the onus falls on the taxpayer to show they had just cause for any error. It is conceivable that SARS could use this as a draconian tool to target individuals. One might even see a scenario where SARS institutes a criminal case in order to defer a large refund knowing the burden and cost will fall on the taxpayer to prove otherwise.

Rocky shoals ahead…

SARS PAYE Deferral – reminder to start paying back

The 35% PAYE deferral for employers under the disaster management relief legislation was extended by another month to cover the August month instead of ending as the end of July. Don’t forget the deferrals now need to be paid back in 6 equal instalments starting on the 7 October until the 7 March 2021, with the timetable as follows:

  • September 2020 – payment due by 7 October 2020;
  • October 2020 – payment is due by 6 November 2020 (last business day before the 7th);
  • November 2020 – payment is due by 7 December 2020;
  • December 2020 – payment is due by 7 January 2021;
  • January 2021 – payment is due by 5 February 2021;
  • February 2021 – payment is due by 5 March 2021.

Further information is available on the SARS website.

Is it just SARS sharpening its teeth, or is this an assault on taxpayer rights?

Proposed new legislation seeks to put additional pressure on taxpayers to ensure the accuracy of their tax submissions. Section 34 of the Draft Tax Administration Laws Amendment Bill, 2020, proposes to amend Section 234 of the Tax Administration Act, which will remove the concept of willfulness (“intention”) from the range of acts that constitute an offence under the Tax Administration Act.

It would mean that you could be guilty of an offence if you neglect to, for example, notify SARS of a change in registered details (addresses, contact numbers, bank accounts, email addresses and public officer), respond to a request for documents or information from SARS late or not pay taxes when due.

Other common problems that could result in punishment include:

  • Supporting documents being misplaced, or clerical errors, which result in adjustments to VAT or PAYE returns by SARS.
  • Late payments of VAT or PAYE by taxpayers due to banking cut-off challenges or pay late due to an error in interpretation of a payment cut-off date.
  • Taxpayers being unaware of a potential tax liability due to ever changing and complex legislation, and such liability being paid to SARS late.

SARS is currently able to impose penalties on taxpayers for such contraventions, so the question that needs to be asked is why these additional measures are necessary. The answer to this is the explanation provided in the Draft Bill. The ‘requiring proof of intention’ in terms of a taxpayer’s action appears to be a sticking point to SARS. This makes prosecution for non-compliance difficult. Remove this hurdle and SARS can prosecute at will.  The proposed change, if passed, will provide SARS with an additional weapon with which to force taxpayers to comply with their filing and payment obligations. So, will ‘intent’ be a mitigating factor of any sort? The concern to tax practitioners and taxpayers alike is that SARS will use a heavy-handed approach to dealing with inadvertent errors in an attempt to improve tax collection. Whilst honest taxpayers have no problem with SARS using legislation to tackle serial tax offenders, it would not be fair and equitable if honest taxpayers who had genuinely made a mistake became collateral damage on this battlefield. It is hoped that sanity will prevail here and that a more measured approach is followed

Can compliance wait?

We always hear that South Africa has some of the best legislation in the world. We also hear that South African has too much red tape that stifles the entrepreneurial spirit. In the 26 years that I have been a tax practitioner I have seen legislation introduced that clearly unnecessarily adds to the compliance burden of the business owner. Very often this legislation is introduced in a haphazard manner that complicates the application of the legislation at company level. The introduction of the Employment Tax Incentive in 2013 is a case in point. We are 7 years down the line and making very slow progress in terms of achieving a stable and easy to understand product.

When dealing with clients and prospective clients, legislative compliance is often a very emotional issue. In our tough economic times, most businesses are concentrating on keeping clients and generating revenue. Compliance almost becomes a nuisance factor. Irrespective of how hard we try and put legislative compliance into the spotlight we find that there is a ready reason to put it on the backburner. No matter how frustrating this is, it isn’t until a crisis that legislative compliance becomes important. So, what constitutes a crisis?

When celebrating the turn of the year very few people would have predicted the position the world would be in now. Enter the COVID-19 pandemic stage left. This unprecedented event has wrought havoc on economies across the world.  In our own economy panic set in when it was announced that there was going to be a general shutdown. The poor state of the economy left most employers ill prepared for such an event and very quickly it was evident that many companies would not be able to pay their employees for April. Government quickly stepped in with the introduction of funding schemes and the TERS UIF scheme.

We were faced with the difficult situation of trying to analyse and interpret this new legislation whilst receiving a deluge of TERS claims to process on behalf of clients. The volume of work was certainly not a problem. The problem was the fact that many of the claims related to new clients who did not run their payroll with us. Compliance issues that we regularly post articles on and highlight in Health Checks to our clients are now the cause of many of these new clients either not getting TERS claims, or having such claims delayed. What is abundantly clear is that compliance around payrolls and the human resources space is one of those areas that organisations are neglecting. Who would have thought that it would take something like COVID-19 to bring these inadequacies and non-compliance into the spotlight.

Whilst we have seen a frantic scramble to meet the necessary compliance standards by many organisations, this behaviour is akin to putting a plaster on a leaking dyke. There has to be a real intention to get the basic building blocks of the payroll / HR process correct.  This is not a very time-consuming process and the solutions need not be expensive, corporate solutions. A practical solution can be designed to ensure that there is legislative compliance and that the company meets industry best practice. ‘Nice to have’ systems can be added at a later stage if a need is established.

Step one though is to highlight the areas of non-compliance, the areas where there are holes, and to not only plug those holes but to implement a basic system that provides the comfort of knowing that non-compliance is not going to cost the company a lot of time and money at some stage in the future.

HRTorQue offers a free HR Health Check to any organisations wanting a snapshot of where they are in terms of compliance and industry best practice. The process takes a maximum of 1.5 hours and the outcome is a report listing the areas of non-compliance and where improvements can be made. If you would like to take advantage of this opportunity you are welcome to contact Dave Beattie on [email protected].

Second Revised Draft Disaster Management Bill

The Second Revised Draft Disaster Management Bill was issued by Treasury on 19 May 2020. Due to the time sensitive nature of the amendments for payroll it was imperative that National Treasury and SARS assist the Payroll Authors Group of SA by issuing the amended requirements that would impact on payroll.

In the latest Bill three of the Employment Tax Incentive (ETI) requirements are deemed to be retrospectively effective from 1 April 2020. The result is that the ETI values that have already been calculated for April in terms of the 1 April Bill must be recalculated by applying the 19 May formulas to the April employee data. The value of the ETI calculated in April for April in terms of the 1 April Bill, will differ from the ETI value calculated in May for April in terms of the 19 May Bill for the following reasons:

The 1 April Bill proposed:

  • An extra ETI amount of R 500
  • That the ETI value for the three extended age groups must not be grossed down if there are less than 160 employed and remunerated hours in April.

The 19 May Bill proposed:

  • An extra ETI amount of R 750
  • That the ETI value for the three extended age groups must be grossed down if there are less than 160 employed and remunerated hours in April.
  • That the ‘1 October 2013 employment start date’ qualifying test is deleted from 1 April until 31 July.

The ETI total for April that is recalculated in May according to the 19 May Bill can be either more or less than the ETI total originally calculated for April according to the 1 April Bill.

The challenge to the administrator dealing with the submission for the monthly EMP 201 returns is the fact that there has been a change in benefits and that an adjustment would need to be made in the May payroll. The difference between the two ETI totals must be applied to the EMP 201 as follows:

  • If the ETI total calculated in May for April is more than the ETI calculated in April for April, then the additional amount can be added to the normal ETI total for May in the May EMP 201
  • If the ETI total calculated in May for April is less than the ETI total calculated in April for April, then the April EMP 201 must be adjusted to reflect the lesser ETI total.

PAGSA is discussing with SARS the issue of the late payment penalty and interest that would be levied if the adjustment explained in scenario 2 was made (to the April EMP 201).

Any adjustment to the ETI totals would also have an impact on the tax certificates. The recalculated ETI values for April must be allocated correctly to the monthly ETI tax certificate fields. If this is not correctly done, the tax certificate amounts will not reconcile with the EMP 201 and EMP 501 totals when tax certificates are submitted to SARS for the 2020 mid-year tax certificate submissions and reconciliations.

Finally, one additional ETI matter that has an impact on the minimum wage qualifying criteria. Section 4(1)(b) of the ETI Act requires that the employee’s wage must not be less than R 2 000 per month, or the grossed-up value of the employee’s wage if employed and remunerated hours are less than 160 hours must not be less than R 2000 per month.

This section has been deleted by the changes in the May 19 Bill and this change will be in effect from 1 May 2020 to 31 July 2020. After this deletion though it was not clear whether or not the employees of that employer qualified in terms of section 4 if there is no wage regulating measure and the National Minimum Wage Act does not apply. SARS after consultation with PAGSA has confirmed that an employer that is not subject to a wage regulating measure and that is exempt from the National Minimum Wage Act is not eligible to benefit from the Employment Tax Incentive.

We are working in times of unprecedented change. Traditionally legislation takes at least a year to pass through the various consultative processes before it is ready for promulgation. In this case we are looking at a compressed consultative process and legislation amendment process. The pressure on payroll companies to make programming changes has been relentless. The timing of legislative changes could not have been worse though. At this point we expect that in a lot of cases changes in ETI claims for April and May, may only happen in June. Whilst we welcome any Government concessions, one has to question why these COVID-19 concessions have had to be so technical and difficult to implement.

Casual workers UIF registration

One of the common mistakes we have seen through the TERS submission process is many employers not registering their casual workers for UIF. The legislation stipulates that any employee who works for more than 24 hours in a month must contribute to UIF. Where employers have not registered and contributed for these casual workers, the casual worker cannot claim UIF. This creates risk for the employer where the casual worker brings a claim against the employer because they are unable to receive their benefits.

Beware the deterioration of the employer and employee relationship

There is an increasingly concerning trend amongst employee organisations inferring employers are legislatively required to do several things including inter alia:

  • Pay their employees in full during the lockdown;
  • Employers cannot force employees to take annual leave;
  • The TERS scheme amendments oblige employers to apply for the relief for employees

These assertions are all incorrect legislatively.

Our concern is not that bad advice is being given. There seems to be plenty of misinformation and bad advice going around.

Our concern is more that this means we are, as employers and employees, in for a whole lot of pain in the coming months. It is never easy going through a recession and downturns and mass restructurings, but if the trust is not there in the first place this is likely to be a very adversarial period. Be warned, this will not be fun for anyone.

Please though make sure you follow the correct procedure and consult, communicate and keep a record! If you need advice or support though any employee restructuring, please contact us on [email protected] .