Recovery of overpaid salaries – what’s fair?

April 1st, 2012

By Brenda Wardle

Questions are frequently asked about the correctness and constitutionality of deductions made by an employer following erroneous payments of salaries and/or benefits and, in the case of public servants, errors that occur as a result of the incorrect interpretation of the collective agreement on the Occupation Specific Dispensation in the Public Service of 2007.

Questions in this regard usually emanate from employees in the public sector, but recently questions have been raised by employees from the private sector too. The case that caused me to research this area of the law extensively was one where employees had responded to an advertisement in a national newspaper for certain positions. The applicants did not meet all the requirements set out in the advertisement but they were nonetheless appointed on the basis of experience and potential. The advertisement contained a stipulated salary with no proviso that it was commensurate with experience.

However, after the candidates were appointed, they were informed that due to a lack of formal qualifications they would be placed on a lesser scale than the one advertised. None of the appointees objected to this. For some reason salaries were paid on the advertised scale despite the contracts of employment being clear about the salary on a lesser scale. This situation led to discontent among other employees. Furthermore, the contracts of employment had stipulated salaries, yet, as far as I am aware, none of the employees queried the overpayments. This is indicative of some collusion, if not malice, between the appointees and another employee, unless of course the appointees had queried why they had been overpaid.

The law

An examination of the law revealed the following.

Section 34 of the Basic Conditions of Employment Act 75 of 1997 states that an employer may not make any deduction from an employee’s remuneration unless the employee consents to the deduction in writing and such deduction is authorised or permitted in terms of law, a collective agreement, a court order or an arbitration award. In addition, an employer may not require or permit an employee to repay any remuneration except for overpayments previously made by the employer resulting from error.

Section 38 of the Public Service Act 103(P) of 1994 permits the deduction of wrongly granted remuneration. This section, on a textual interpretation of the provisions, would be subject to the Prescription Act 68 of 1969 (and the three year prescription period in certain instances for institution of action proceedings for the recovery of debt) and possibly also the National Credit Act 34 of 2005, with its stipulation of amounts (percentages of remuneration) that can be deducted by public sector employers in compliance with emoluments orders. Implict in s 38(2)(b)(ii) of the Public Service Act is a right of the officer or employee, with a corresponding obligation on the state, to ensure –

‘that other benefit [not due to him] shall be discontinued or withdrawn as from a current date, but the officer or employee concerned shall have the right to be compensated by the state for any patrimonial loss which he or she has suffered or will suffer as a result of that discontinuation or withdrawal’ (my emphasis).

Legitimate expectations

If one relies on the substantive canons of interpretation, the most applicable would be the rarely used Rule of Lenity (applicable in its purest form to cases where there is ambiguity in criminal statutes). In terms of this rule, any such ambiguity ought to be resolved in favour of the defendant. There have been cases before South African courts where incorrectly granted remuneration was sought to be recovered after a period of three years. Although there is no law that prohibits the deduction of wrongly granted remuneration in South African law, the doctrine of legitimate expectation ought to find applicability.

I would strongly argue that the period over which the error was made without being corrected ought to be critical in the final analysis. This could possibly be the reason the legislature inserted the provision cited above into the Public Service Act. In extended periods of payment it ought to be remembered that the employee might have already entered into debt, based his budget on income on a higher scale, purchased vehicles, possibly moved into a bigger home and all other such considerations. Withdrawing the benefit would then adversely affect such employee’s affordability and could lead to the anomalous situation where his compulsory declarations made in terms of the National Credit Act become inaccurate, if not void, and have to be amended ex post facto. This is where, in my view, the prejudice arises and the deductions after extended periods of payment on a higher scale would not pass constitutional muster.

The limitation on the right of the employee to have his legitimate expectations protected appears to be unjustifiable in an open and democratic society. Despite the fact that the doctrine of legitimate expectation was not translated as a right into the final Constitution, this doctrine is firmly entrenched as part of South African administrative law.

The Constitution, as indicated, does not confer on citizens the right to protection of their legitimate expectation as the interim Constitution did. I should, however, hastily add that the Labour Relations Act 66 of 1995 gives effect to the right to fair labour practice as enshrined in s 27 of the interim Constitution. Unfairness, in my opinion, further sets in when interest per annum is levied on debts owing to the state.

Other deductions

In 2000 the Minister of Finance, acting in terms of s 80(2) of the Public Finance Management Act 1 of 1999, approved the differentiation between categories of debts. In terms of this, debts due to the state resulting from the service relationship between public servants and the state shall be recovered without interest with the exception of wrongly granted remuneration in instances where the person has left the employ of the state, where the employee committed malicious acts, in instances of contractual breach and, finally, where monetary advantage resulted from the fraudulent action of the employee. These categories cannot be faulted. It ought to be remembered that in ‘no-fault’ instances the employer is entirely to blame for the error and it is thus incumbent on the employer not to penalise a former employee for interest when the loss occurred through no fault of the employee. In any event, the Basic Conditions of Employment Act provides for deductions from employees and I would further advance that ex-employees are specifically excluded.

A further complication is the fact that employers are under a duty to ensure that errors in remuneration are avoided. It is common cause that the determination of an employee’s tax, the amounts to be paid by the employer in lieu of Skills Development Levies (SDL) and the Unemployment Insurance Fund (UIF) depend on the amount of remuneration paid. Other deductions, for example those relating to pension, retirement annuity and medical aid, are also dependent on correct calculations.

None of the provisions of the Public Finance Management Act, the Basic Conditions of Employment Act nor the Public Service Act addresses the imbalance occasioned by the overpayment of Pay As You Earn and UIF contributions. The statutory provisions thus have a further discriminatory dimension in that no provisions are made for the repayment to the employee of contributions that were excessive because they were based on wrongly granted remuneration. The employer is thus favoured and the intention behind the legislation appears to be geared at ensuring that the employer is refunded the wrongly granted remuneration, without any provision for the resubmission to the relevant authorities by the employer of tax, SDL, UIF and other contributions. The Unemployment Insurance Act 63 of 2001 also makes provision for repayment within 90 days of demand of wrongly granted benefits, with no corresponding provisions for refunds of wrongly paid contributions.

The Canadian Labour Code, at 254.1, contains provisions similar to the ones in South African law. While public servants at least have express recourse in relation to patrimonial losses as indicated above, their counterparts in the private sector are afforded no such relief. Their success in such instances would thus have to be judged on a case-by-case basis. It is time that the law relating to deductions is reformed to bring it in line with other relevant pieces of legislation.

In respect of the factual background sketched in the introductory paragraphs, I think the employer would be well within its rights to engage the employees, inform them of the need to debit an affordable portion of their salaries and face any legal action if and when it arises.

Brenda Wardle LLB LLM (Unisa) is a legal consultant and independent labour analyst in Johannesburg.

This article was first published in De Rebus in 2012 (April) DR 26.

De Rebus