Con­tract em­ploy­ees’ con­tri­bu­tions must be treated dif­fer­ently

Weekend Argus (Saturday Edition) - - PERSONALFINANCE - MARTIN HESSE

If you are em­ployed by an or­gan­i­sa­tion on a short-term con­trac­tual ba­sis, your re­tire­ment fund con­tri­bu­tions should be treated dif­fer­ently from those made by the or­gan­i­sa­tion’s per­ma­nent em­ploy­ees. You may be em­ployed on a to­tal cost-to­com­pany ba­sis, in which case the en­tire con­tri­bu­tion will come from your re­mu­ner­a­tion, and if your con­di­tions of em­ploy­ment state that mem­ber­ship of a re­tire­ment fund is vol­un­tary, you can­not be pre­vented from leav­ing the fund while in ser­vice.

In a re­cent case be­fore the Pen­sion Funds Ad­ju­di­ca­tor, Mu­vhango Lukhaimane, a mu­nic­i­pal of­fi­cial com­plained that his em­ployer would not let him with­draw from its prov­i­dent fund de­spite the fact that, un­der the terms of his em­ploy­ment, his mem­ber­ship of the fund was vol­un­tary. His em­ployer un­suc­cess­fully ar­gued that his with­drawal would con­tra­vene the In­come Tax Act.

In Septem­ber 2015, Mr R, who was em­ployed on a short-term con­tract with Man­guang Metropoli­tan Mu­nic­i­pal­ity, queried a dis­crep­ancy be­tween the prov­i­dent fund con­tri­bu­tion re­flected on his pay-slip and the amount on his ben­e­fit state­ment from the Free State Mu­nic­i­pal Prov­i­dent Fund, which he had joined in Jan­uary 2015.

Mr R said in his com­plaint to the ad­ju­di­ca­tor that, when he sub­se­quently wanted to re­sign from the fund, he was told he could not with­draw while he re­mained in ser­vice.

He sub­mit­ted he had not re­ceived any doc­u­ments con­firm­ing that his mem­ber­ship was a con­di­tion of em­ploy­ment and, there­fore, com­pul­sory.

In re­sponse to the com­plaint, the prov­i­dent fund said Mr R con­trib­uted R1 515 a month and his em­ployer con­trib­uted R6 060. The to­tal monthly con­tri­bu­tion re­ceived in re­spect of Mr R was R7 575. The fund ad­mit­ted that an ad­min­is­tra­tive er­ror had oc­curred that had led to the con­tri­bu­tion for Jan­uary 2015 not re­flect­ing on Mr R’s record. This had since been rec­ti­fied.

The Man­guang mu­nic­i­pal­ity sub­mit­ted that Mr R was re­mu­ner­ated on a to­tal cost-to-com­pany ba­sis. In other words, the to­tal prov­i­dent fund de­duc­tion (his and his em­ployer’s con­tri­bu­tion) came from his re­mu­ner­a­tion.

The mu­nic­i­pal­ity said it used the same pay­roll sys­tem for all em­ploy­ees, hence all con­tri­bu­tions were split into “em­ployer con­tri­bu­tion” and “em­ployee con­tri­bu­tion”. Em­ployee con­tri­bu­tions were 4.5 per­cent of pen­sion­able salary and em­ployer con­tri­bu­tions were 18 per­cent of pen­sion­able salary.

The mu­nic­i­pal­ity said fund mem­ber­ship was com­pul­sory be­cause of how pen­sion fund and prov­i­dent fund were de­fined in the In­come Tax Act. Fur­ther, while a mem­ber re­mains in ser­vice, he or she is not al­lowed to with­draw from mem­ber­ship.

In her de­ter­mi­na­tion, Lukhaimane said Mr R’s con­di­tions of em­ploy­ment gave him the right to elect to be­come a mem­ber of the prov­i­dent fund. In other words, mem­ber­ship was not com­pul­sory, and the mu­nic­i­pal­ity was “mis­guided” in as­sert­ing that the In­come Tax Act made it com­pul­sory for all em­ploy­ees to be mem­bers.

The Act reg­u­lates the treat­ment of con­tri­bu­tions and ben­e­fits to and from a re­tire­ment fund only once a per­son who qual­i­fies to be a mem­ber of a fund joins such a fund, she said.

“In [Mr R’s] in­stance, he is not com­pelled by his con­di­tions of ser­vice to be a mem­ber of the prov­i­dent fund. In ad­di­tion, [he] is re­mu­ner­ated on a to­tal costto-em­ployer ba­sis. This means that all the con­tri­bu­tions made to the [fund] were made by him, and none can be at­trib­uted to the [em­ployer].”

Lukhaimane said that, on the mu­nic­i­pal­ity’s ad­mis­sion, the only rea­son Mr R’s con­tri­bu­tions were clas­si­fied into em­ployer and mem­ber con­tri­bu­tions was be­cause his re­mu­ner­a­tion was man­aged on the same pay­roll sys­tem as that of em­ploy­ees who were com­pelled to be­long to the fund.

“There­fore, the [em­ployer] has taken upon it­self to re­gard a cer­tain por­tion of [ Mr R’s] re­mu­ner­a­tion pack­age as em­ployer con­tri­bu­tions, which is man­i­festly un­law­ful.”

Lukhaimane said it was a prac­tice of lo­cal au­thor­i­ties to ap­point skilled in­di­vid­u­als to spe­cific po­si­tions on a con­tract ba­sis, nor­mally for a pe­riod of up to five years. Th­ese in­di­vid­u­als en­ter into an em­ploy­ment con­tract based on a cost-toem­ployer pack­age.

“It is the re­spon­si­bil­ity of the [Man­guang Metro Mu­nic­i­pal­ity] to en­sure that its em­ploy­ees are well in­formed about their par­tic­i­pa­tion in a fund that would ac­com­mo­date their re­mu­ner­a­tion struc­ture and em­ploy­ment con­di­tions.

“It is fur­ther the re­spon­si­bil­ity of lo­cal au­thor­i­ties to en­sure that em­ploy­ees ap­pointed on a con­tract ba­sis are pro­vided with the ap­pro­pri­ate fund in which their con­tri­bu­tions will be in­vested for their ben­e­fit, thereby avoid­ing fi­nan­cial prej­u­dice as­so­ci­ated with de­fined-ben­e­fit funds where mem­ber­ship is for a lim­ited pe­riod of time.”

The ad­ju­di­ca­tor or­dered the mu­nic­i­pal­ity to re­fund Mr R the to­tal amount of all the con­tri­bu­tions made on his be­half. ◆ You can con­tact the Pen­sion Funds Ad­ju­di­ca­tor by phon­ing 012 748 4000, email­ing en­quiries@pfa.org.za, or writ­ing to PO Box 580, Men­lyn, 0063. The web­site is www.pfa.org.za

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