Mpho Kgomongoe, Head: Legal and Technical Services at Simeka Consultants & Actuaries

One of the more complex issues facing retirement funds arises where a member is dismissed from employment, cashes out and receives their withdrawal benefit from their retirement fund, but is subsequently reinstated pursuant to a CCMA or Labour Court order. While labour law is relatively clear on the consequences of reinstatement, retirement fund and tax laws do not always provide straightforward answers.

What does a reinstatement order mean?

In terms of section 193 of the Labour Relations Act, reinstatement is the primary remedy for unfair dismissal. The Constitutional Court in Equity Aviation Services (Pty) Ltd v CCMA confirmed that reinstatement places the employee back into the position they would have occupied had the dismissal never occurred. The employee resumes employment on the same terms and conditions that existed immediately prior to the dismissal.

The Constitutional Court described reinstatement as restoring the employment contract and returning the employee to the position before the dismissal. In essence, where reinstatement is ordered retrospectively, the dismissal is treated as though it never occurred.

This has important consequences for retirement fund membership.

The retirement fund dilemma

A withdrawal benefit may become payable because the member has exited the service of the employer. From the fund’s perspective and in terms of the rules of the fund, the payment is lawful when made.

The difficulty arises when a later CCMA or Labour Court ruling effectively determines that the employee ought to never have ceased employment. If employment is reinstated retrospectively, the legal basis for the withdrawal no longer exists because the employee is deemed to have remained in service throughout the period.

This creates an anomaly:

• Labour law says the member is continuously employed.
• Retirement fund records may show the member exited service and received a withdrawal benefit.

For this reason, some funds seek to manage this risk through clear fund rules, containing provisions that require repayment of the withdrawal benefit upon reinstatement or, alternatively, for the member to be treated as a new entrant (with no retrospective adjustment to prior benefits or service, unless otherwise permitted by the rules).

Some employers manage the risk by withholding the claim form if there is a possibility of a reinstatement order on the basis that, where benefits have already been paid and reinstatement subsequently occurs, it creates uncertainty regarding the member’s position – including whether prior service should be recognised, whether repayment of the benefit would be required, and whether the member should be treated as a new entrant to the fund. In addition, it cannot reasonably be expected of the fund to place the member in precisely the same position as if the withdrawal benefit had never been paid.

Should the withdrawal benefit be repaid to the fund?

In principle, there is nothing preventing a retirement fund from accepting repayment of a previously paid withdrawal benefit, provided:

• the fund rules permit such a correction;
• the repayment is necessary to give effect to a reinstatement order; and
• the fund’s administrator can properly reconstruct the member’s fund credit.

Repayment seems like the most logical outcome because it restores the member to the position they would have occupied had the dismissal not occurred. However, the reality is that the member might no longer have the funds available.

Even if the member is able to repay the benefit, practical difficulties emerge, including determining the amount that should be repaid. The member would have received the benefit less tax under a SARS tax directive.

The question is therefore whether repayment should include the gross withdrawal benefit with possible additional investment growth. Neither pension legislation nor most fund rules provide explicit guidance.

Timing issues

It is not uncommon for reinstatement disputes to take months or even years to resolve.

During this time:

• the member may have spent the withdrawal benefit;
• the fund may already have issued tax certificates;
• contributions may not have been paid; and
• benefits may have been transferred to another retirement fund.

The longer the delay, the more difficult the reconstruction exercise becomes.

The tax treatment

The most difficult aspect of these cases is the tax treatment. When the withdrawal benefit was originally paid, SARS withdrawal tax tables would have been applied correctly at the time of payment.

However, if the withdrawal is later repaid due to reinstatement, the legislation is unclear as to how the earlier tax event should be unwound.

Questions that arise include:

• Can the original withdrawal tax be reversed?
• Will SARS allow the withdrawal benefit to be treated as though it never accrued?
• Can a revised tax directive be issued years later?
• Will the member receive a refund of taxes already paid?
• Will the historic withdrawal remain on the member’s cumulative withdrawal tax history?

The Income Tax Act does not appear to contain an explicit mechanism dealing with the reversal of a withdrawal benefit following a Labour Court reinstatement order. As a result, there is uncertainty about whether SARS would recognise the repayment as effectively cancelling the original taxable event.

Should the member be treated as a new entrant?

Even if the rules provide that no repayment will be made but that the member will be regarded as a new entrant, practical difficulties may still arise, like:

• Should the employer pay over the contributions retrospectively, including administration costs and the cost for insured risk benefits plus late payment interest?

• Where the fund provides for insured risk benefits, will the member have to undergo underwriting again and will any waiting periods start afresh?

• Will the member now have to pay administration costs for two records, where the retirement component is likely still in the fund as a paid-up benefit?

Should the employer withhold benefit claim forms in the event of a dispute regarding a person’s dismissal?

Some employers justify withholding the retirement fund claim form if there is a possibility of a reinstatement order on the basis that, where benefits have already been paid and reinstatement subsequently occurs, it creates uncertainty regarding the member’s position with the fund.

It may be argued that withholding a withdrawal claim form is in the member’s best interest, as it avoids these complexities and ensures certainty and consistency in the event that reinstatement is ultimately granted.

However, there is no legal basis to withhold the claim form and it may not be fair towards the member if the member is unemployed and may need the benefit to sustain themself.

Conclusion

A CCMA or Labour Court reinstatement order generally means that the employment relationship is restored and, particularly where reinstatement is retrospective, the employee is treated as though they had never left employment. This creates tension where a retirement fund has already paid a withdrawal benefit based on the assumption that the employee’s service terminated.

Funds, administrators and employers are left to navigate a significant legislative gap, balancing the objectives of reinstatement under labour law against the practical realities of retirement fund administration, tax compliance and fairness to members.

Until regulatory guidance is issued, funds should consider addressing these scenarios expressly in their rules and administrative procedures. In addition, CCMA Commissioners and Labour Court judges should be mindful of the retirement fund consequences that may arise when granting retrospective reinstatement orders.

Until legislative clarity is provided, retirement funds, employers and administrators should adopt a proactive and rules-based approach to managing reinstatement scenarios in order to minimise uncertainty and ensure equitable outcomes for affected members.

ENDS