An article published in December 2023 by Labour Guide brought the landmark judgement by the Labour Appeal Court (LAC) in the matter of Quantum Foods (Pty) Ltd v Commissioner H Jacobs N.O. and Others (JA85/2022) [2023] ZALAC 27, to the attention of PAGSA (Payroll Authors Group of South Africa).

This article is written by Rob Cooper, the Chairman of PAGSA and one of our training partners, with the aim of pointing out the implications of the Quantum Foods judgement for payroll suppliers and employers, and how to implement it.

The facts of the case are summarised in clause [2] of the LAC Judgement, copied from Appendix B for convenience:

“[2] In an attempt to bring its employees’ wages in line with the prescripts of the [NMW] Act, the appellant (Quantum Foods) restructured its payslips to include a contractual bonus, as well as the contributions it paid to a provident fund on behalf of its employees. The bonus may, at an employee’s election, either be paid annually or in equal monthly payments Once those amounts were factored in, the wages met the minimum threshold prescribed by the [NMW] Act.”

Refer also to clauses [12] to [16] of the judgement.

LAC Judgement – the ‘Bottom Line’

The LAC judgement in clause [33] concludes that the following types of payments by an employer to, or on behalf of, an employee, must be included when calculating ‘wage’ for the purposes of the NMW ACT:

1.    Contractual (or non-discretionary) bonuses, and

2.    Employer-paid contributions on behalf of an employee to a Provident Fund.

Before discussing the judgement in more detail, it is important to take note of the following aspects of the judgement.

Legislation Affected by the LAC Judgement

The Court was not called upon to apply the facts of the case to the BCEA.  The LAC judgement is therefore applicable to the NMW ACT only, specifically to the ‘calculation of wage’ provided for in section 5(1) of the NMW ACT, and it must not be applied when calculating ‘wage’ for the purposes of the BCEA.

This is discussed in more detail in a later section.

Implementation of the LAC Judgement by Payrolls and Employer

The Labour Appeal Court is the highest labour court in the country, barring the Constitutional Court that can sit on labour law matters. The judgement must be applied by payroll suppliers and employers going forward.

Effective Date of the LAC Judgement

Our assumption is that the judgement became effective from the date that it was delivered (18 October 2023).

LAC Judgement – Contractual Bonuses

‘Contractual’ (or non-discretionary) bonuses are those bonuses where the employee has a contractual entitlement to be paid the bonus by the employer.  The employer has no choice (or discretion) to not pay the bonus.

NMW ACT section 5(1) specifies how to calculate ‘wage’ for the purposes of the NMW ACT, and section 5(1)(c) excludes ‘gratuities’ from the calculation of wage as follows:

“5.   Calculation of wage.—

(1)  Despite any contract or law to the contrary, the calculation of a wage for the purposes of this Act is the amount payable in money for ordinary hours of work excluding —

(c) gratuities including bonuses, tips or gifts; …”       [my emphasis added]

On the first reading of section 5(1)(c), it appears that all bonuses (i.e. both contractual and non-contractual bonuses) are excluded from the calculation of ‘wage’ by section 5(1)(c).

However, the LAC interpreted section 5(1)(c) to mean that only gratuitous (or discretionary) bonuses are excluded from the calculation of wage.  Because contractual bonuses must be paid, they are not gratuitous, and are therefore not excluded from the calculation of wage by section 5(1)(c).

Therefore, all contractual bonuses must be included in the calculation of ‘wage’ for the purposes of the NMW ACT.

PAGSA Comments – Contractual Bonuses

Contractual Bonuses must have a Contract

To be a ‘contractual bonus’, a binding contract must be in place, as stated in clause 19 of the LAC Judgement:

[19] Mr Niewoudt, who appeared for Quantum Foods, submitted that the term “bonus” can either denote a gratuitous payment, which is within the discretion of an employer, or a payment that is due in terms of a binding contract, depending on the context in which the term is used. In the latter case, the payment of the bonus does not depend on the whim of the employer but is an enforceable contractual obligation.

An unambiguous bonus contract that is clear on what employees will receive as a contractual right and what is gratuitous (or discretionary), will make it much easier for the employer and the payroll to comply.

The NMW ACT Definition of ‘Wage’

Just for interests’ sake, contractual bonuses are now examined to see if they are ‘wage’ as defined by the NMW Act.

Before doing so, note that although the contractual bonus amount might not be ‘wage’ as defined in the NMW Act, in terms of the interpretation of section 5(1)(c) of the NMW Act by the LAC Judgement, it must still be ‘calculated as wage’.

The NMW ACT defines ‘wage’ to be “the amount of money paid or payable in respect of ordinary hours of work”, and this definition is repeated with slightly different wording (‘for’ instead of ‘in respect of’) in section 5(1).

In other words, to be ‘wage’, the amount must:

1.    Be paid in money (cash), and

2.    It must be paid in respect of ordinary hours of work.

If these two conditions are not met, then the amount paid is not ‘wage’ by definition.

Contractual bonuses are paid in money (cash), thereby meeting the first condition, but how does one determine if an amount of money is paid in respect of ordinary hours of work?

The answer is widely understood to be that the cash amount paid must be directly based on (or calculated from) the number of ordinary hours worked during a period of employment such as a day, or a week (commonly referred to as a ‘weekly wage’), or a month (commonly referred to as a ‘monthly salary’).

The question that then follows is: Are contractual bonuses paid in respect of ordinary hours of work?

To answer this question, one would have to examine the nature (substance) of the contractual bonus.

A ‘13th Cheque’ type of contractual bonus is certain to meet this condition because it is in essence an accumulated monthly ‘salary’ or weekly ‘wage’ amount that for convenience (or other reasons) is paid as a single lump sum in a specified month of the year.

But it is possible that other types of contractual bonuses including but not limited to various flavours of retention and attendance bonuses are not paid in respect of ordinary hours of work and are therefore not ‘wage’ by definition.

As an administration aside, in the months in which the ‘13th Cheque’ bonus is not paid, the value of wage will not only be less than in the bonus month – it might also be less than the prescribed national minimum wage in those 11 months (but not in the bonus month).

The practical solution is to pay the 13th Cheque in monthly payments and to change the bonus contract accordingly (as Quantum Foods did), in which case it becomes what it is in substance, a monthly salary (or wage).

The LAC Judgement Rationale

It is interesting to note that in reaching the conclusion that all contractual bonuses must be calculated as ‘wage’, it appears from an examination of the Judgement clauses, that both the definition of ‘wage’ in the NMW ACT and the wording in section 5(1) ‘Calculation of Wage’ that refers to “for ordinary hours of work”, were referred to in clause [29] of the Judgement (copied into the section below), but were not taken further into consideration by the LAC.

The LAC judgement concludes that because a contractual bonus is not a gratuity:

• It is not excluded from the calculation of ‘wage’ by section 5(1)(c), and
• If it is not excluded, then it is included in the calculation of ‘wage’ for the purposes of meeting the national minimum wage rate set by the NMW ACT.

LAC Judgement – Employer-paid Contribution to a Provident Fund

Clauses 29 and 30 of the LAC Judgement explain the court’s reasoning when concluding that contributions “payable” to a Provident fund by the employer on behalf of an employee must be included in the calculation of ‘wage’ for the purposes of the NMW ACT.

“[29] I now turn to the issue of the provident fund contributions. It is instructive that section 5(1) does not expressly include or exclude such payments. The question therefore arises as to whether it is ‘payable’ to employees “in money for ordinary hours of work” and whether it falls under any one of the exclusions.

[30] A reasonable construction of the term ‘payable’ in accordance with the abovementioned canons of interpretation can only mean “that which is required to be paid in money to an employee”. It would accordingly include any payment to be made on his or her behalf. Any other interpretation would simply not make any sense and I did not understand Mr Bayi to contend otherwise.”

Further, clause 31 states:

“[31] The provident fund contributions paid by Quantum Foods on behalf of its employees manifestly do not fall under any of the exclusions mentioned in subsections 5 (1)(a), (b), or (c). They must, accordingly, be factored into the calculation of the employees’ hourly rate.”

PAGSA Comments

There are three aspects of Clauses [29], [30], and [31] of the LAC Judgement that are of interest, discussed below.

In Respect of Ordinary Hours of Work

In clause [29], the Judgement raises the question of whether the payment is ‘payable’ to employees “in money for ordinary hours of work”, but then goes on in clause [30] to focus on the word “payable”.  As discussed in the previous section, the Judgement appears to not take the words “for ordinary hours of work” into consideration.

The value of an employer-paid contribution amount to a Provident fund is calculated according to the rules of the Provident fund, generally a percentage of accumulated remuneration types, or more commonly, a percentage of Retirement Funding Income (or ‘pensionable salary’).

In addition, in a ‘Cost to Company’ or ‘Package’ remuneration regime, employees are sometimes allowed by choice to increase the calculated value of the contribution if they want to save more towards retirement, which essentially changes the way in which the contribution amount is calculated.

From this can be seen that the value of an employer-paid contribution to a Provident fund is not calculated from, or based on, ordinary hours of work, therefore the contribution is not ‘wage’ as defined by the NMW ACT.

‘Paid or Payable to a Worker’

The NMW ACT defines ‘wage’ to be “the amount of money paid or payable to a worker in respect of ordinary hours of work”.  [Incidentally, for the purposes of this Article, the term “worker” is equivalent to the term “employee”]

A strict interpretation of the words paid “to a worker” would result in any contribution that is paid directly to the Provident fund by the employer, to not be ‘wage’.

However, the employer could pay the contribution to the employee, who then in turn pays it to the Provident fund. In other words, the employer is acting as an agent (or ‘conduit’) to relieve the employee of the administration burden.

Clause [30] of the LAC Judgement interprets “payable” to mean “… that which is required to be paid in money to an employee”. It would accordingly include any payment to be made on his or her behalf.”

From the above, it appears that the contribution paid by an employer on behalf of an employee to a Provident fund, satisfies the NMW ACT definition of wage that requires the contribution (money) to be paid to a worker.

Payment in Kind

Clause [31] of the LAC Judgement states that “The provident fund contributions paid by Quantum Foods on behalf of its employees manifestly do not fall under any of the exclusions mentioned in subsections 5 (1)(a), (b), or (c). They must, accordingly, be factored into the calculation of the employees’ hourly rate.”

Section 5(1)(b) excludes ‘payments in kind’ from the calculation of wage for the purposes of the NMW ACT.

The concept of a ‘payment in kind’ is a difficult one and is outside of the scope of this Article, but it must be discussed briefly because NMW ACT section 5(1)(b) excludes:

“any payment in kind including board or accommodation” from the calculation of wage.

If an employer-paid contribution to a Provident fund is a ‘payment in kind’, then it would be excluded from the calculation of wage by section 5(1)(b) for the purposes of the NMW ACT.

Clearly, the LAC does not interpret an employer-paid contribution to a Provident fund to be a ‘payment in kind’.

The questions that then follow are:

1.    What is a ‘payment in kind’?

2.    If an employer-paid contribution to a Provident fund is not a payment in kind, then what is it?

What is a ‘Payment in Kind’

The LAC Judgement is in terms of the NMW ACT, but as a guide to the concept of a ‘payment in kind’, it helps to turn to the BCEA that defines remuneration to be “any payment in money or in kind, …, made … to any person in return for that person working for any other person”.  [my emphasis added]

The NMW Act defines ‘wage’, but it does not define ‘remuneration’, nor does it define a ‘payment in kind’.

There are two schools of thought that interpret a ‘payment in kind’ to be either:

1.    A non-cash ‘Benefit in kind’, and an employer-paid contribution to retirement funds, medical schemes, etc. OR

2.    A non-cash ‘Benefit in kind’.

My understanding is that the International Labour Organisation favours the second option and interprets a ‘payment in kind’ to be a non-cash benefit (i.e. a ‘benefit in kind’) granted by an employer to an employee for services rendered.

In addition, section 5(1)(b) qualifies “any payment in kind” with the words “including board or accommodation“. These qualifying words imply that payments in kind for the purposes of section 5(1)(b) are the non-cash ‘benefits in kind’.

These two points supports the LAC Judgement that concludes in clause [31] that employer-paid contributions to a Provident fund are not payments in kind (because they are not non-cash benefits in kind that are payments in kind).

This means that they are not excluded from the calculation of ‘wage’ by section 5(1)(b), and because they are not excluded, they are included in the calculation of wage for the purposes of the NMW ACT.

If employer-paid contributions to a Provident fund are not payments in kind, then what are they?

The LAC Judgement does not go this far, but to get some guidance to answer this question for the NMW Act, it helps to refer to the BCEA that defines ‘remuneration’ (but unfortunately does not define a ‘payment in kind’).

For the purposes of the BCEA, it is logical to conclude that employer-paid contributions to a Provident fund:

1.    Are ‘remuneration’ by definition (because they are payments “… in money … made … to any person in return for that person working for any other person”).

2.    Are not ‘wage’ by definition (because they are not calculated from, or based on, the ordinary hours of work).

For the purposes of the NMW ACT, employer-paid contributions to a Provident fund:

1.    Are calculated as ‘wage’ in terms of the LAC Judgement

2.    Are not ‘wage’ by definition (because they are not calculated from, or based on, the ordinary hours of work).

One must conclude that this last seemingly contradictory conclusion is simply a case of ‘that’s just how it is’.

Implications of the LAC Judgement

Application of the LAC Judgement to other Employment Legislation

As described in the article in Appendix A, the CCMA followed by the Labour Court, concluded that ‘wage’ consists of only the cash payment for ordinary hours worked.

The LAC disagreed.  Based on its interpretation of sections 5(1)(b) and (c), it concluded that for the purposes of the NMW ACT, contractual bonuses and employer-paid contributions to provident funds must be calculated as ‘wage’.

Therefore, the LAC judgement only applies to the ‘calculation of wage’ as specified by section 5(1) of the NMW ACT.

The LAC Judgement does not extend to the BCEA – it only determines what ‘wage’ is for the purposes of the NMW ACT by specifying how it must be calculated in section 5(1).  The LAC judgment must also not be applied to the Employment Tax Incentive Act because the ETI Act links its definition of ‘wage’ directly to the BCEA definition of ‘wage’.

The conclusion appears to be that ‘wage’ must be calculated:

1.    According to the BCEA definition for BCEA purposes (overtime, sick leave, Sundays worked, etc.).

2.    According to the ETI Act definition for ETI Act purposes (Section 4 Compliance with Wage Regulating Measures).

3.    According to the LAC Judgement for the purposes of the NMW Act (to ensure that employee’s wages are not less than the national minimum wage rates set by the NMW Act).

Lastly, one trusts that the case that resulted in this LAC judgement will not be used as a precedent to encourage a similar case against the BCEA.  If this did happen and an equivalent LAC judgement ever applied to the BCEA, the result would be a significant increase in the employer’s cost of the payments to employees that are calculated using BCEA ‘wage’ (overtime, sick leave, Sundays worked, public holidays worked, family responsibility leave).

This is unlikely – the BCEA does not have an equivalent to NMW ACT section 5(1) that specifies how to calculate ‘wage’.

The Schedule referred to in BCEA section 35(5)(a) that was published in Government Gazette No. 24889 on 23 May 2003 specifies how to calculate ‘remuneration’, not ‘wage’.

Payroll Calculations of ‘Wage’

From the above can be seen that the value of ‘wage’ calculated in accordance with the LAC judgement for the NMW ACT, will have a different value from that calculated for the BCEA for those employees that the employer pays:

1.    Contractual bonuses, and/or

2.    Contributions to a Provident Fund.

Depending on the features offered by their payroll system, payroll suppliers can consider providing for two calculations of ‘wage’ in their payroll systems:

1.    One calculation for the purposes of the BCEA definition of wage, and

2.    Another calculation for the purposes of the NMW ACT in terms of the LAC Judgement.

Fortunately, as discussed above, a third calculation of ‘wage’ for the purposes of the ETI Act is not necessary.

Employer-paid Contributions to Third-Party entities

The facts of this case are that the payments were made by the employer to a Provident fund.

However, it seems reasonable to conclude that the reach of the LAC judgement can be extended to include employer-paid contributions on behalf of employees to other third-party entities such as pension and retirement annuity funds, medical schemes, funeral schemes, income protection schemes, etc. and that these payments must now be included in the calculation of ‘wage’ because they are not excluded by section 5(1)(b).

This logical extension of the LAC Judgement, coupled to the ‘Atlas Finance’ case in 2022 that came to a similar conclusion regarding commission and that is outside of the scope of this Article, has far-reaching implications for the value of ‘wage’ calculated for the purposes of the NMW Act.

Example of a Wage Calculation in terms of the LAC Judgement

The national minimum hourly wage rate has been increased to R27,58 per hour from 1 March 2024.

Assume that an employee is paid a cash wage of R22,00 per hour in respect of the ordinary hours of work, i.e. below the national minimum wage rate per hour of R27,58 per hour.

In terms of the LAC Judgement, the employer will comply with the national minimum wage if in addition to the cash wage paid at R22,00 per hour, the employer:

1.    Pays a contribution to a Provident fund on behalf of the employee that equates to R6,00 per hour, or

2.    Pays the employee a contractual bonus that equates to R6,00 per hour.

Re-structuring of the Calculation of Wage for the purposes of the NMW ACT

Most employers contribute to third party entities such as retirement funds, medical schemes, funeral schemes, etc. on behalf of their employees, including those in the lower income brackets.

The LAC Judgement now allows employers to take contractual bonuses and/or employer-paid contributions to third-party entities into account in addition to the cash ‘wage’ paid in respect of the ordinary hours of work, to meet the minimum wage rate set by the NMW ACT.

This will result in a higher wage value being calculated for the purposes of the NMW ACT than what it was before the LAC Judgement, potentially considerably higher than the national minimum wage.

Prior to the LAC judgement, employers would have had no option but to increase the cash wage amount to remain compliant with the national minimum wage rate, and the employer-paid contributions and the contractual bonuses would still have been paid.

Post the LAC judgement, employers, under these circumstances and over time, need not increase the cash wage value.

This potential result appears to be contradictory to the intention of the NMW ACT.

In Conclusion

Despite the uncertainty created by the fact (as explained above) that some types of payments that are not ‘wage’ in terms of the definition of ‘wage’ in the NMW Act, must be calculated as ‘wage’ in terms of the LAC Judgement, it is very important to note that this uncertainty does not change the fact that the LAC judgement must be obeyed.

The Labour Appeal Court is the highest labour court in the country (barring the Constitutional Court that can hear labour law matters). The calculation of ‘wage’ specified in the LAC Judgement for the purposes of the NMW ACT must be applied by payroll suppliers and employers.

It remains to be seen whether the Department of Employment and Labour will over time find that the result of the implementation of the LAC Judgement in the workplace is contrary to the intention of the NMW ACT.

However, it appears unlikely that in the short term the Department of Employment and Labour will amend section 5(1) of the NMW Act to nullify the LAC Judgement.

Lastly, the PAGSA has been busy with this difficult matter since mid-December 2023 and has consulted widely to ensure that we explain the LAC judgement as clearly and as correctly as possible.  However, for peace of mind and certainty regarding specific circumstances, readers are advised to seek legal advice. All information provided by the PAGSA is subject to its disclaimer that can be found on its website.

Written by Rob Cooper, Chairman of the Payroll Authors Group of South Africa