Offering workplace loans eliminates the need for your employees to approach expensive loan sharks or take out high-interest payday loans when they have an emergency.
It can boost morale and enhance their loyalty. However, you must make sure you comply with the legislation to protect yourself and them.
If you give your employee a salary advance to be repaid on the next payday, this is not governed by the National Credit Act (NCA), as there is an employer/ employee relationship that is not considered to be at arm’s length.
If you provide longer-term loans to your employees and charge interest or fees, you and your employee are independent of each other (at arm’s length), and you will benefit from this agreement.
In this case, you must follow the provisions outlined in the NCA and register as a credit provider with the National Credit Regulator (NCR), which promotes fair and responsible lending. Failure to register could render your credit agreements null and void, and you will have no legal recourse to recover money owing to you.
On registration you pay a once-off fee followed by an annual renewal fee. You must submit regular reports to the NCR, and they may conduct regular compliance checks at your premises.
The NCA specifies that as a lender, you must:
Conduct an affordability assessment and credit check before determining how much the employee can afford to repay each month.
Draw up a quotation that specifies the interest rate, terms, costs, and conditions.
Explain all the loan details, including costs, interest, and repayment terms.
Draft a loan agreement, to be signed by you and the employee.
Ensure that the interest rate and all other fees and charges are within the NCA limits.
Ensure that the interest rate is fair and reasonable.
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DEBT AGREEMENT TIP Include a clause in your debt agreement to cover what happens if the staff member leaves your employ and there is an outstanding debt.
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To protect both yourself and your employee, include the following:
The loan amount
Repayment terms (such as a monthly salary deduction)
Interest rate
Procedure to be followed if the employee defaults
Signatures of both parties
As a registered credit provider, you must also comply with the Financial Intelligence Centre Act (FICA). This act aims to detect and prevent financial crimes, such as money laundering, terrorist financing, fraud, and tax evasion.
You will need to establish processes to detect and report any suspicious activities, which will add to your compliance costs.
Compliance with the appropriate legislation is onerous, and costly. You may want to consider using a third-party wage access provider who takes care of all of these aspects for your business.
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TIPS FOR EMPLOYERS
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According to the Basic Conditions of Employment Act, employees have to consent in writing to any deduction from their salary, except for mandatory deductions such as tax, contributions to the Unemployment Insurance Fund, and a garnishee order.
If you have given an employee a salary advance, they must agree to the salary deduction; if it’s a staff loan, there must be a signed agreement in place, with an agreed-to repayment schedule.
The deduction can’t exceed 25 percent of their salary, and no outstanding loan amount can be automatically deducted from their severance pay, unless previously agreed upon.
There are no tax repercussions with salary advances or workplace loans with an aggregate amount of less than R3 000. 
If the aggregate amount exceeds R3 000, there may be tax implications, depending on the interest rate you charge. If it is lower than the official interest rate, the employee is taxed on the difference between the official interest rate and the interest rate charged.
The difference in the interest is calculated as a monthly amount and added to the employee’s taxable income as a fringe benefit. It must also be reflected in the employee’s IRP5. The official interest rate is based on the repurchase rate or repo rate and changes on the first of the month following any change in the repo rate.
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HOW TO WORK OUT THE FRINGE BENEFIT Loan amount: R10 000 Loan term: 12 months
Workplace loan interest rate: 5 percent Interest for the year at the official interest rate: R825 Interest charged on workplace loan: R500 Difference: R325 (R825-R500) Fringe benefit amount to be added to employee’s salary each month: R27.08 (R325/12) |
Without such a clause you will have to follow the debt recovery process as outlined in the NCA.
Official interest rate: