The following article was recently published in the Career Times of the Cape Times written by Helyn Patten of Webber Wentzel Bowens law firm.
Employers who make loans to employees will need to register as credit providers to satisfy the criteria of the National Credit Act, or face penalties.
Employee loans will be classified as credit agreements if there is a deferral of payment, and a fee, charge or interest is levied on the deferred amount. The National Credit Act applies to every credit agreement between parties dealing at arm's length and made within, or having an effect within, South Africa, subject to a number of exclusions.
It could be argued that employee loans are credit agreements which are concluded between parties not dealing at arm's length, in that an employee may be considered to be in a dependant relationship with their employer who
may not necessarily strive to obtain the utmost advantage out of the transaction. The National Credit Regulator, however, considers employee loans to fall within the ambit of the National Credit Act. The correct interpretation will have to be determined by the courts in due course.
An employer must register as a credit provider if:
- It, alone or in conjunction with any associated person, is the credit provider of under at least 100 employee loans; or
- The total principal debt owed under all outstanding employee loans exceeds R500 000.
Employers who satisfy these two criteria and fail to register as credit providers by July 28, may still do so, but could be issued with a notice by the National Credit Regulator requiring the employer to register as a credit provider. In addition, the employer may incur a penalty imposed by the National Credit Regulator.
It is an offence not to comply with such a notice and employers may be subject to fines or imprisonment of up to 12 months, or both. Employee loans taken out after June 1st may be declared unlawful by the courts if an employer is required to, and has not yet registered as a credit provider.
Unlawful employee loans are void from the date entered into and the employer must refund the employee any money it has received from the employee, with interest. Employers who don't fall into either of the above categories and therefore don't need to register as credit providers must
still comply with the provisions of the Act where it applies to employee loans.
These may include those pertaining to maximum interest, fees and charges; prevention of reckless credit, agreements in the prescribed form; statements of account; pre-agreement statements and quotations; debt recovery procedures, and the prohibition of preferential payment instructions.
Helyn Patten is a Senior Associate, Corporate Services, at a corporate law firm – Webber Wentzel Bowens.