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Contract employees’ contributions must be treated differently

Personal Finance

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-to-company 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.

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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 cost-to-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-to-employer 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 [email protected], or writing to PO Box 580, Menlyn, 0063. The website is www.pfa.org.za

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