How should the directors’ fees of Non-Executive Directors be treated for tax purposes?

Historically there has been some uncertainty on the tax treatment of fees paid to a Non-Executive Director (NED). SARS has recently issued two Binding General Rulings (rulings), the purpose of which is to set out SARS practice. Taxpayers are not bound by these rulings because they do not constitute law. SARS however is bound by the rulings, which creates certainty for taxpayers .

There are two possible tax consequences which NEDs could face in relation to their directors fees. The first relates to employees tax and the second to value-added tax (VAT).

The rulings note that if a director is not subject to the control or supervision by the company as to the manner in which the NED’s duties are performed or to their hours of work, the directors’ fees will not be regarded as remuneration and will not therefore be subject to employees’ tax (PAYE).

The rulings go on to state that if the directors fees paid to a NED are not subject to employees tax. The NED will be considered to be an independent contractor . When this is the case, the NED will be regarded as carrying on an enterprise for VAT purposes and will be required to register for VAT if the amount of the fees exceeds the compulsory VAT registration threshold of R 1million in a twelve month period.

NEDs are not considered to be employees under the common law rules. As a result NEDs are considered to be independent contractors who must register for VAT if their fees exceed the R1 million threshold.

The rulings are effective from 1 June 2017 until they are amended or withdrawn. The rulings are silent on the tax treatment which is to apply prior to 1 June 2017. A NED who has received directors’ fees that have exceeded the VAT registration threshold and has neither accounted for VAT or employees’ tax for periods prior to 1 June 2017 should take further advice on their position.

This article was written by Dale Cridlan,  a Director at Norton Rose Fulbright South Africa

Negative vetting as a ground for automatic termination of a contract of employment

Employers are entitled to include a condition in a contract of employment that a person’s appointment is subject to a positive vetting and screening process and, if the outcome is negative, the contract will terminate automatically.

In the Labour Appeal Court decision of Nogcantsi v Mnquma Local Municipality and Others (2017) 38 ILJ 595 (LAC), Mr Nogcantsi’s appointment as a security officer to the municipal manager was subject to a positive vetting and screening process conducted by the Municipality. The vetting process revealed pending charges against him for defeating the ends of justice, interfering with police officers whilst on duty and attempted murder. Mr Nogcantsi’s contract terminated automatically.

The LAC found that it was not the act of the Municipality which produced the negative vetting result and consequently caused the condition to be fulfilled resulting in the automatic termination. Instead, the negative outcome of the vetting was constituted by information which was patently and objectively negative of and concerning Mr Nogcantsi’s suitability for the position. The automatic termination did not amount to a dismissal as it was not triggered by an act of the Municipality with the intention of ending the employment relationship.

The LAC further found that the vetting condition did not prevent Mr Nogcantsi from exercising his right to security of employment conferred on him by the Labour Relations Act 1995 (the Act). (Although the Act does not explicitly provide that security of employment is a right, the Constitutional Court found in NEHAWU v University of Cape Town 2003 (3) SA 1 (CC) that security of employment is a core value of the Act and is dealt with in Chapter VIII of the Act which regulates unfair dismissals.) Not only had Mr Nogcantsi freely and voluntarily agreed to the vetting process and to an automatic termination if it yielded a negative result, but the condition was material to his suitability for the position of a security officer. Such a condition could be reasonably likened to the condition in a contract of employment as a pilot or chauffeur that a valid pilot’s or driver’s licence must be produced.

This decision demonstrates that a conditional contract of employment is a commercial reality and that the law does not prevent employers from including vetting conditions in their contracts of employment.

This article was written by Brian Denny,  a Director at Norton Rose Fulbright South Africa

Changes to the Occupational Health and Safety Act 2004 (Vic)

The WorkSafe Legislation Amendment Bill 2017 (Vic) (the Bill) amends the Occupational Health and Safety Act 2004 (Vic) (OHS Act), along with others including the Dangerous Goods Act 1985 (Vic). The Bill has received its second reading in the Legislative Assembly and is listed for resumed debate on 24 May 2017.  If passed, the Part dealing with the OHS Act is intended (according to the explanatory memorandum) to come into operation on 1 July 2017 and the remaining provisions at least by 21 March 2018 (if not proclaimed).

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Disability Discrimination on recruitment

It is not only employees who have the right to claim discrimination: Applicants for employment can also be discriminated against. Employers must therefore ensure that any recruitment process is not discriminatory.

A recent case of Government Legal Service –v- Brookes considered a recruitment process to the Government Legal Service (GLS).  Applicants to that service are required to sit a psychometric test known as the Situational Judgement Test (SJT).  The claimant contacted the GLS in advance and informed them that she was likely to find the multiple-choice format of the SJT particularly difficult because of her Asperger’s Syndrome. She suggested adjustments that could be made, but was informed that an alternative test was not available, but that she would be entitled to additional time at a later stage.  As a result she completed the SJT and narrowly missed the pass mark and so did not proceed to the next stage of the recruitment process.

The individual claimed indirect disability discrimination, discrimination arising from a disability, and a failure by GLS to make reasonable adjustments and was successful in the employment tribunal.

The first ground of appeal to the EAT related to the indirect discrimination claim. To prove indirect discrimination the claimant needed to show that the “provision, criterion or practice” (PCP) (i.e. the requirement that all applicants pass the SJT) put a group of individuals who had Asperger’s Syndrome at a disadvantage compared to those who did not have the syndrome. It was also necessary to show that the claimant herself was at such a disadvantage and it was this part of the tribunal’s decision that was appealed.

The EAT held that the employment tribunal had been entitled to conclude (from medical evidence and an assessment of the claimants background and experience) that the PCP placed the claimant herself at a disadvantage. No alternative theory had been put forward by GLS as to why she had failed to achieve the pass mark and therefore it was possible for the tribunal to conclude, on a balance of probabilities, that it was as a result of the format of the test.

The second ground of appeal was whether the requirement to sit the SJT in the form of multiple choice questions was unjustified both for the indirect discrimination claim and also in determining the reasonable adjustments that the employer should make.

The EAT held that it was not possible to justify the process as being a proportionate means of achieving a legitimate aim. Whilst the EAT acknowledged that it was necessary for the GLS to test an applicant’s competency, this was not the only means of doing so as an alternative form of assessment (namely short narrative responses) was available. The argument in respect of the reasonable adjustments was similar; given the scale and duration of the recruitment process and the resources of the GLS, an alternative option could have been available.

Employers should therefore take care in establishing the testing process. Although psychometric testing is often used to provide a level playing field and to avoid human intervention or judgment, if an employer is asked to make an adjustment to the assessment process for recruitment which could be processed without affecting the validity of the test, then it should be carefully considered.

Minimum wage increase in Québec: some employers are flexing their muscles

On May 1, 2017, the minimum wage in Québec was raised from $10.75/hr to $11.25/hr. Although not as substantial as the increases that have recently been implemented in other North American jurisdictions, this raise is still significant when compared with the average annual increase implemented in the province for the past 10 years.

Some employers seem to take this situation as an opportunity to reorganize their employees’ working conditions in the name of profitability. For example, it has been reported in the media that some employers have decided to stop offering the usual 15-minute coffee breaks (which have to be paid) during a 7-hour shift, replacing such breaks with a 30-minute lunch break, which does not have to be paid, pursuant to the Québec Labour Standards Act. It goes without saying that this tactic is not very popular with the affected employees because it results in them having less money in their pockets, even with the $0.50/hr raise…

Before enforcing such measures, employers should carefully evaluate the potential impacts on their workforce: from mass resignations to constructive dismissal claims to unionization campaigns, not to mention bad publicity, it might be safer to hold still for the time being.

Reinstatement of employees following disingenuous consultation

The Fair Work Commission has recently made orders reinstating four employees whose employment had been terminated for reason of redundancy. The decision is a timely reminder of the importance of employers ensuring that they consult in a meaningful and genuine way with affected employees in a redundancy situation, where those employees are covered by an award or other industrial instrument.

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Enterprise bargaining – minor technical deficiencies can derail the whole process

If your business is considering making an enterprise agreement, you must strictly comply with the procedural requirements of the Fair Work Act 2009 (FW Act) and ensure you use the newly amended Notice of Employee Representational Rights. For those who have already commenced bargaining, small mistakes made during the bargaining process may mean the parties’ agreement cannot be approved and the entire bargaining process must start all over again, which can be very costly and frustrating for all parties.

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Dismissals for established poor performance may – still – be unfair

Just for once, we will talk about French lawyers. We say “for once”, because only a minority of lawyers in France are employees (a very large majority of us are self-employed).

From a French employment law point of view, although the employee in the particular case we will discuss here was a lawyer, that is actually completely irrelevant to the principle at stake, as the decision rendered by the French Supreme Court can be extended to any employee, regardless of their role.

Generally speaking, an employee’s poor performance may result in dismissal, and poor performance is widely used in France as a legitimate ground for termination of an employee’s contract. In the event of litigation, French courts will verify that certain conditions are met, particularly that the targets assigned to the employee were duly communicated to them (in the French language), and also that such targets were achievable.

In the present case, an employee was recruited as a lawyer by a law firm. In addition to her duties as a lawyer, she was entrusted with the management of a secondary office of her law firm. During the first three years of her employment, she was not subject to any criticism or reproach. At the beginning of the fourth year however, she was notified in writing that the turnover she achieved was significantly under budget, in particular due to late invoicing of her clients. She was dismissed for poor performance a few months thereafter.

The employee challenged her dismissal, arguing notably that the poor results used by her employer as justification for the termination of her employment contract were due not only to the fact that several employees of the secondary office she managed were often absent (and she had not been granted the ability to recruit additional staff), but also that she returned from maternity leave on the basis of a part time contract.

Both the Court of appeal and the French Supreme Court held that the employee’s dismissal was unfair as the poor performance could not be accountable to her. The underlying idea is consistent with the prior decisions of the Supreme Court: an employee cannot be dismissed for poor performance in cases where their employer has not provided them with sufficient material and human resources to perform their duties.

Butt out! (ergonomically speaking): British Columbia Court of Appeal outlines management and union rights in employee accommodations

On February 28, 2017 the British Columbia Court of Appeal issued a decision that should be welcomed by unionized employers dealing with accommodating employees.  In Telus Communications Inc. v. Telecommunications Workers’ Union, 2017 BCCA 100 the issue was whether the employer was able to deal directly with its unionized employees when attempting to accommodate those employees or whether there was a duty to first consult with the union.

The Union’s position was that the certificate of bargaining authority gave it the right to engage in all requests for accommodation for a medical disability.  In the case before the Court the Union said this included a requirement it be consulted about the ergonomics in the employer’s workplace.

In the initial arbitration, the arbitrator sided with the union.  He held that the union was entitled to notice, information and consultation whenever the employer attempted to accommodate an employee.  According to the arbitrator, involving the union in the accommodation helps ensure a fair and reasonable accommodation is reached.

On appeal, the British Columbia Supreme Court overturned the arbitrator’s decision.  The Court held that a union does not have a general right to participate in the accommodation unless:

  • the union has participated in creating a discriminatory policy or rule;
  • the union’s agreement is necessary to facilitate accommodation; or
  • an employee requests the union’s involvement.

The Court of Appeal agreed with the lower Court’s ruling.  The effect of this is that unless the three conditions identified above by the British Columbia Supreme Court exist or a collective agreement explicitly requires an employer to involve the union in accommodation efforts, accommodation falls within the rights of management to direct and manage the workforce. Employers have no general obligation to involve the union in accommodation discussions.

This decision is helpful for employers because it clarifies that unions do not have a general right to be involved with every accommodation.  In most cases employers should be free to deal directly with their unionized employees in crafting a reasonable accommodation.  However, as with any accommodation case, each situation must be assessed on its own facts.

Prior to dealing directly with a unionized employee, employers should consider the following:

  • Does the collective agreement explicitly require the employer to engage the union in the accommodation process?
  • Has the employee requested union involvement in the accommodation process?
  • Does the proposed accommodation require the union’s approval (for example, will it require the union to waive a term of the collective agreement)?
  • Has the union participated in creating the discriminatory policy or rule?

If the answer to any of the above is yes, then the employer may have to notify the union and seek its participation in the accommodation process.

Of course, there may be other reasons why the employer would want the union involved in a given case.  With this decision, employers have more guidance regarding when they can choose to proceed directly with the employee.

The Supreme Court of Canada will hear a pay equity case

In October 2016, we informed our readers and clients that the Québec Court of Appeal had unanimously upheld a Superior Court decision finding certain sections of the Pay Equity Act (Act) unconstitutional. The sections of the Act in question are those relating to retroactivity, employee participation in audits and posting of audit results.

As was expected, the Attorney General of Québec (AGQ) applied for leave to appeal of this decision before the Supreme Court of Canada. On April 27, the highest Court in the country granted this request to the AGQ.

This leaves everyone in limbo as to whether the Act will remain as it is at the moment. Until the Supreme Court definitely settles the issue, we reiterate our position that employers should continue to maintain pay equity and that it would be advisable to conduct the exercise annually.

We will closely follow developments in this matter.