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    The Consultant     A Quarterly Recruitment Report, Compliments of FCA Recruitment
Do you know all there is to know about unemployment insurance?
Inspections
The Unemployment Insurance

Commissioner has been taking a leaf out of SARS' book and has been conducting UIF inspections with very profitable results. These seem to have started in earnest last year, and initially the large financial institutions were targeted. I am aware of three of the major banks who were the first targets, and who paid penalties of approximately 10 million rands between them!

Since then, quite a few other large employers have been inspected, and have paid penalties amounting to hundreds of thousands of rands.

However, one large company who faced a penalty of a quarter of a million rands had the guts to resist the demand, and it appears that they have been successful. The purpose of this article is to advise employers of the grounds for the penalties being assessed, and the grounds on which they can be resisted. The fact that the banks accepted the penalties is not a reason for others accepting them.

Reasons for penalties being raised
It is common knowledge that the Unemployment Insurance Fund is bankrupt, and is running on a bank overdraft. There is new legislation in the pipeline which will give them a lot more income (which will be dealt with in a later issue), but there is an immediate need for more funds to be obtained - urgently. This is presumably the reason for the flurry of investigations, based on the definition of earnings in the existing UIF Act, which is somewhat ambiguous. Let's look at the actual definition, in section 3 of the Act: (1) In this Act, unless the context otherwise indicates, "earnings" means any payment in money or in kind or both in money and in kind made or owing to any person, which arises in any manner whatsoever out of employment, and includes any cost of living allowance, but does not include -
(a) . . . . . . . . . .
(b) . . . . . . . . . .
(c) . . . . . . . . . .
(d) . . . . . . . . . .
(e) Any special payment, special bonus or special allowance, unless the Minister, after consultation with the board, either generally or in respect of any contributor, determines otherwise.

There are two problems with this definition:
What are payments in kind?
That word is not defined in the Act.
What does special mean?
That word is also not defined in the Act.
Payments in kind

The UIF inspectors invariably regard the taxable portion of a medical aid fringe benefit as falling within the meaning of in kind. I have also seen a case where they regard the taxable fringe benefit on interest free loans as similarly falling within the meaning of in kind. In yet other cases, they regard pension fund contributions as falling within this meaning.

Because the word is not defined in the Act, we must look to the normal meaning of the word. The dictionaries I have consulted state that it means goods, produce or tangible items. While there is no doubt that most fringe benefits are taxable in terms of the Income Tax Act, there is no connection between the Income Tax Act and the Unemployment Insurance Act. An intangible fringe benefit cannot fall into the definition of kind, which means goods or tangible items. There can accordingly be little doubt that intangible fringe benefits do not fall within the definition of earnings in the Unemployment Insurance Act. Only tangible benefits (such as a company car) would be included, but the value at which they should be included is debatable. Any claim for penalties based on the non-inclusion of intangible fringe benefits should therefore be resisted.

Special payments, special bonuses or special allowances
All such items are excluded from the definition of earnings, as set out in paragraph (e) of the definition quoted earlier. Once again, we have to refer to a dictionary for the meaning of special. The meaning in the dictionary I consulted is "out of the ordinary".

When is an allowance "out of the ordinary"? One interpretation could be when it is not paid regularly (or ordinarily). If this is the correct interpretation (as I believe it to be), the fixed allowances paid each pay period would not be special, and would thus be included in earnings. Another meaning could be when they are for a special purpose. If this interpretation is correct, then such allowances would not fall within the definition of earnings.

Where there is such doubt, one would look to the Unemployment Insurance Commissioner for guidance. According to a directive from the Commissioner quoted in the June 2000 issue of Taxgram, a periodic magazine published by Butterworths: It follows that also excluded from 'earnings' for unemployment insurance purposes would be entertainment allowances, travel allowances, subsistence allowances and any reimbursive allowances of whatever nature. Therefore, in accordance with the Commissioners own directive, most fixed allowances are not earnings for unemployment insurance purposes.

The fact that the Commissioner has subsequently changed his


mind (correctly, in my opinion) regarding such allowances is immaterial. According to the well-established legal doctrine of legitimate expectations, the Commissioner's conduct in issuing this and earlier rulings creates a legitimate expectation that the "special" allowances referred to are not subject to Unemployment Insurance. While the Commissioner may change his mind about such allowances, until he issues a public ruling withdrawing the earlier rulings, an employer can rely on them. There is accordingly little doubt that until he does so, there is no liability in regard to such allowances. So once again, any claim for penalties based on the non-inclusion of fixed allowances should also be resisted. However, if you are not already doing so, it would be advisable to include all regularly paid allowances in all future unemployment insurance contribution calculations.

Commissioner's practice in paying claims
The Commissioner's unvarying past practice in paying claims over the years leads to one further ground for rejecting the claim that contributions must be calculated on fringe benefits and allowances. Even if the principle of legitimate expectations arising from the Commissioner's rulings was not applicable, a further argument in respect of such legitimate expectations can arise from this past practice of paying claims. This practice only changed a few months ago when it was vigourously and successfully challenged.

Even if an employer had been calculating UIF contributions on the total earnings of an employee, including all allowances, only the basic salary would be taken into account by UIF claims clerks when calculating benefits. This was so even if the calculation was challenged, and the employee who was claiming benefits produced proof that he/she had paid UIF contributions on total earnings. The Act clearly states that benefits are to be calculated on earnings, and there is only one definition of earnings in the Act. Because of this unvarying practice over many years until about May 2001, an employer would have a legitimate expectation that the same interpretation of earnings would apply to the calculation of contributions. The Commissioner cannot have one interpretation for contribution purposes, and another for the calculation of benefits.

Incidentally, if you have any employees for whom you have been paying contributions on their various allowances, you will probably find that when they claimed UIF benefits, the benefits were based on basic pay only, as stated above. If you do have this problem, you should demand that the benefits are correctly re-calculated on all earnings, including allowances. This instruction has apparently (at last!) filtered down to the clerks dealing with benefits.

Ron Warren
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