In recent times, the CCMA received an increase in the number of referrals. The process at the CCMA usually starts off with conciliation, in which both parties, without prejudice, attempt to resolve the dispute, usually through either reinstatement, reemployment or compensation.
In many cases, the employer does not want to focus more time and effort on defending their decision of dismissal, and in order to save further costs, the employer may agree to compensate the dismissed employee.
In such cases, the question now arises: does the employee pay PAYE on this settlement amount, and if so, how much? How must the payroll of the employer be setup to adjust for this? A very well written and detailed article by Werksmans Attorneys, answered the above questions (See link to full article below).
For the purpose of this article, we will summarise the most important points and only focus on settlement payments at the CCMA related to dismissals based on misconduct, and not for settlement agreements related to dismissals based on operational requirements (i.e. retrenchments).
The Labour Court in Penny v 600 SA Holdings (Pty) Ltd (2003) 24 ILJ 967 (LC) stated the following: “An employer has a statutory obligation in terms of the Income Tax Act to deduct the required tax from any remuneration which it pays to an employee.” Therefore, should the settlement be considered ‘remuneration’, the employer is obliged to deduct the required tax from it.
In some cases, the settlement agreement will indicate if the total amount received by the employee must before or after PAYE deduction. However, if the settlement agreement is silent on this part, the Labour Court in AL SHA Trading Pty Ltd vs Neil Harrison, the CCMA and the Sheriff of the High Court, Germiston, J235/15, concurred that the amount will be gross of PAYE and will be subject to lawful PAYE deductions in the hands of the employee-party.
When considering that the required tax must be calculated on gross PAYE, it is important to understand how “gross income” is calculated. In the Income Tax Act 58 of 1962, gross income is defined as “any amount…, including any voluntary award, received or accrued”. Therefore, SARS has confirmed that CCMA and Labour Court awards, such as settlement agreements, will be taxed under the general definition of “gross income” in section 1 of the Act.
What is important, though, is that ultimately, the part of the definition of “gross income” that is applicable, would be determined by the purpose of the settlement.
In conclusion, an employer is legally obliged to withhold PAYE from the CCMA settlement amounts. However, in circumstances where it can be established that the settlement agreement is in respect of services rendered, rather than the termination of the services, the employer is obliged to apply to SARS for an income tax directive to ascertain the amount of PAYE that must be withheld from the settlement. On the other hand, if the settlement agreement is to settle a matter of alleged unfair dismissal, such settlement agreement will be included in the gross income, and taxed accordingly. If there are any uncertainty, is would be best to visit your local SARS or appoint a tax practitioner to assist.