"Remuneration! O, that’s the Latin word for three-farthings." - [Shakespeare] In grappling with a new definition of remuneration, the Minister of Labour should have looked to the Bard for guidance.
During the NEDLAC negotiations on Government’s proposed amendments to section 35 of the Basic Conditions of Employment Act 75 of 1997 (BCEA), which regulates the calculation of remuneration and wages, Government tabled a draft schedule of payments to be treated as remuneration when calculating notice pay, annual leave and severance pay.
On 25 April 2002, Government tabled a new draft schedule. Two payments, namely long service allowances and employer contributions to the Unemployment Insurance Fund that were included in the previous draft schedule have been excluded from the new definition.
2. The problem of defining what is "remuneration"
In terms of the new BCEA Bill, the Minister is empowered to determine, by notice in the gazette, which payments in money or in kind, fall within the definition of remuneration. The current Basic Conditions of Employment Act and Labour Relations Act does not define specifically what is remuneration.
"Remuneration" means any payment in money or in kind, or both in money and in kind, made or owing to any person in return for that person working for any other person, including the State. [BCEA]
3. The importance of this definition for employers
There are a number of provisions in various employment laws, which require payments based on an employee's remuneration. The problem lies in calculating what amounts fall within the definition of remuneration.
4. Determining whether an employees earns equal to or below the Earnings Threshold
"Earnings" means gross pay 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. Employees who earn above the Earnings Threshold are excluded from Sections 9, 10, 11, 12, 13, 14, 15, 16, 17 and 18(3) of the BCEA Act. This definition of "earnings" appears to be different to the classic definition of "remuneration".
5. Calculation of Skills Development Levies
The employer must pay a skills development levy from 1 April 2001 at a rate of 1% of the leviable amount. Leviable amount - The total amount of remuneration paid or payable, or deemed to be paid or payable, by an employer to its employees during any month, as determined for the purposes of determining employees tax in terms of the Fourth Schedule to the Income Tax Act, whether or not such employer is liable to deduct or withhold such employees tax. Important: Remuneration paid to employees below the income tax threshold (i.e. in those cases where no employees tax is deducted) must be incorporated into the remuneration for determining the leviable amount. The term "remuneration" is here used as defined in the Income Tax Act.
6. Calculation of UIF contributions
The levy of 2% of remuneration is payable in equal shares (i.e. 1% each by the employer and the employee). Contributors and employers of contributors earning above the income threshold of R97 188 per annum shall contribute 1 % of the threshold and such income contributors shall receive benefits payable at this threshold level.
Remuneration means: "remuneration" as defined in paragraph 1 of the Fourth Schedule to the Income Tax Act, but does not include any amount paid or payable to an employee -
(a) By way of any pension, superannuation allowance or retiring allowance;
(b) Which constitutes an amount contemplated in paragraphs (a), (cA), (d), (e) or (eA) of the definition of "gross income" in section 1 of the Income Tax Act; or
(c) By way of commission;
Once more, the term "remuneration" is here used as defined in the Income Tax Act.
7. Calculation of leave pay, notice pay, severance pay
Pay for annual leave section 21(1) An employer must pay an employee leave pay at least equivalent to the remuneration that the employee would have received for working for a period equal to the period of annual leave [BCEA]
Section 35(5) For the purpose of calculating an employee's annual leave pay in terms of section 21, notice pay in terms of section 38 or severance pay in terms of section 41, an employee's remuneration-
(a) Includes the cash value of any payment in kind that forms part of the employee's remuneration unless the employee receives that payment in kind; but
(b) Excludes gratuities, allowances paid to an employee for the purposes of enabling an employee to work; and any discretionary payments not related to the employee's hours of work or work performance.
8. Orders of the CCMA or Labour Court (up to 12 months pay = "remuneration")
We anticipate that much time will be spent in the CCMA and Labour Court presenting evidence and argument as to the monetary value of any compensatory awards.
9. Retirement Fund contributions
Poorly worded wage agreements with trade unions or contracts of employment (commonly used words such as "pay", "salary", "wages", "total cost to company", "nett pay", "basic salary" have no legal meaning). This problem emerged in the Univ. of Western Cape Academic Staff Union and Univ. of Western Cape: -
This is an application concerning the interpretation and application of a collective
agreement that was made an order of court in settlement of a retrenchment dispute. The term of the collective agreement that forms the subject of this dispute is the following:
"1. All retrenched employees who are part of this agreement shall receive…. (e) Payment of accumulated leave up to a maximum of 365 days"
It was common cause that the calculation of the leave pay was not discussed during the negotiations that preceded the conclusion of the collective agreement. The Union argued that the term "full pay" was normal pay, plus allowances and benefits.
Held: The right was for the payment of "full pay", not "remuneration" as defined in the BCEA. The BCEA prescribes that the calculation of leave pay be based on remuneration. Remuneration is defined to include payment in money or kind or both. The parties deliberately chose the words "full pay" instead of "remuneration" which they used in clauses preceding clause 1.e of the collective agreement. The parties therefore tacitly elected not to render the collective agreement subject to the BCEA. That being so, and having regard to the primacy of collective bargaining and dispute resolution by consensus, the BCEA was, I find, excluded by tacit agreement by the parties. THE UNIVERSITY OF THE WESTERN CAPE ACADEMIC STAFF UNION and THE UNIVERSITY OF THE WESTERN CAPE Labour Court C801/2001
In an attempt to widen the Income Tax net, SARS has produced its own definition of "remuneration" which is different to the proposed definition of remuneration in terms of the Basic Conditions of Employment Act.
10. SARS Definition of Remuneration
# Section 4 of the Skills Development Levies Act
# Section 1 of the Unemployment Insurance Contributions Act:
Meaning any amount of income which is paid or is payable to any person whether in cash or otherwise and whether or not in respect of services rendered:
Some examples are:
>Salary; > Leave encashment; >Remuneration for overtime; > Fees; > Superannuation allowance; > Bonus; > Allowances; > Retirement allowance; > Wages; > Commission; > Voluntary awards; > Gratuities; Annuity; > Restraint of trade payments; > pensions; > stipend etc,
The following are excluded from "remuneration" and consequently no employee tax is deductible:
> Common law independent contractors, but excluding independent contractors who are subject to the control or supervision of any person as to the manner in which their duties are performed or as to the hours of work, or if the amounts paid or payable to them are payable at regular daily, weekly, monthly or other intervals;
> Any pension or allowance in terms of any of the following Acts:>aged Persons Act; >Blind Persons Act; >Disability Grants Act; >Children’s Act; Amounts paid to an employee to reimburse the employee for actual business expenses incurred (i.e. expenses incurred on behalf of the employer on an agency basis), in the course of employment.
> Any allowance or advance in terms of an order of divorce or decree of judicial separation or agreement of separation.
11. A new definition of Remuneration
On 17 May 2002, the Minister published a new draft definition of remuneration. It is proposed that the following types of payments are included in the definition of remuneration for purposes of calculating payment for overtime in terms of section 10(2), pay for annual leave in terns of section 21, payment instead of notice in terms of section 38 and severance pay in terms of section 41:
Service increment; Merit increment; Car allowance; > Housing allowance, housing subsidy or housing received as a benefit in kind; Shift work allowance if worked regularly; Standby allowance if received regularly; Overtime pay if overtime is worked regularly; Food and accommodation allowance or value of food and accommodation provided
> Discretionary payments related to an employee's hours of work if received regularly e.g. an attendance bonus; > Discretionary payments related to an employee's work performance if received regularly e.g. production bonus based on the employee's output; > Employer's contributions to medical and provident fund scheme; > Employer's contributions to death benefit scheme; > Employer's contributions to UIF and any other statutory insurance cover; > Employer's contributions to personal accident insurance cover; > Long service allowance if received regularly; > Thirteenth cheque if not discretionary
It is proposed that the following items is excluded from the definitions of remuneration as discussed above:
> Relocation allowance; > Gratuities e.g. a gold watch given as a long service award, or a farewell gift on termination of employment; > Discretionary payments not related to an employee's hours of work or performance e.g. profit-sharing scheme; > Entertainment allowance; > Danger pay; > Underground allowance; > Inconvenience allowance; > Dog allowance; > Education and schooling allowance; and >Transport/bus to enable employee to travel to and from work provided as an in kind benefit, or as an allowance.; > In respect of payment in kind, it is proposed that the formula for determining value of payment in kind should be as follows; > An agreed value which is not less than the cost of the employer; or if it is not agreed, the cost to the employer.
Government’s draft definition of remuneration (in terms of the Basic Conditions of Employment Act) is extremely broad and will undoubtedly hold severe cost implications for employers. As a result of this new definition of remuneration, employers would also need to exercise great care in drafting employment contracts, especially in identifying how amounts are calculated and which amounts form part of "remuneration" and those do not form part of remuneration. There may also be greater reluctance on the part of employers to implement other financial benefits or "perks" in light of this new definition.
The proposed definition of remuneration would greatly increase the cost of employees and would, in many instances, require the reformulation of automated payroll software which may use different formula for calculating severance pay, notice pay, overtime pay and leave pay. It seems incomprehensible that car allowances, an housing allowance or housing subsidy or housing received as a benefit in kind; shift work allowance if worked regularly; and a standby allowance would be included in the definition of remuneration when calculating leave pay or overtime pay.
The definitions themselves seem to be circular in nature. For example, while an employee would receive a December bonus (or thirteenth cheque), presumably in December of each year, this would still be included in the calculation of overtime pay, leave and notice pay.
"A man must properly pay the fiddler. In my case it so happened that a whole symphony orchestra had to be subsidized." John Barrymore (1882 - 1942)
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