Whether you employ someone to help you run a small business or to water your garden, there are things you can do, besides paying higher wages, to vastly improve your employee's package.
In an ideal world, employers would reward loyal, hard-working employees with remuneration appropriate to their service. But often the small-time employer - the family that needs domestic help or the plumber who needs an assistant - is forced to pay for help in line with what the family earns, or what the business makes, rather than what the employee deserves. Here are a few - mostly inexpensive - ways to ensure that you not only stay on the right side of the law, but that your employee enjoys benefits similar to those a large company would offer.
You don't have to give your employees a full written contract, but in terms of the Basic Conditions of Employment Act (BCEA), you must give them "written particulars" of their employment.
This applies to anyone who works for you, other than an independent contractor, unless that person works for you for less than 24 hours a month. Giving your employees a letter of appointment or a contract will make them feel more secure about the job and will cover you against any disputes about the terms and conditions of employment. In the written agreement, you must, at the very least, include:
- Your name and address, as the employer;
- Your employee's name and address, and a brief description of the work the employee is expected to do;
- The place where the employee is to work;
- The wages you will pay for that work and the rate, or method, of calculating that pay;
- Details of any payment in kind to which the employee will be entitled;
- How often you will pay the employee;
- The rate of pay for overtime work, and work on Sundays and public holidays;
- Any leave to which the employee is entitled; and
- The notice period that applies if either of you wants to terminate the employment contract.
This is the barest minimum you need to include if you employ domestic help. Further particulars are needed for other categories of employees.
The Department of Labour has some toolkits on its website ( www.labour.gov.za), containing information about what is required in terms of the BCEA, and including sample contracts of employment for the domestic sector and small businesses.
If the nature of the employment relationship you plan to enter is complicated, lawyers suggest you seek professional advice, or you could find a self-drafted contract being used against you.
Also remember that you cannot include in the contract anything that contravenes conditions stipulated in the Act. You will find guidance on the Department of Labour's website, or contact the department on (012) 309 4000.
As an employer who contributes to the government's Unemployment Insurance Fund (UIF) on an employee's behalf, you will offer your employee some security if he or she is without a job one day. If your employee becomes too ill to work, or you are forced to close your business, your employee may be without an income. If you contributed to UIF, your employee would be entitled to claim benefits.
Benefits are currently paid at 45 percent of your latest salary. However, a new Unemployment Insurance Act is due to be enacted in April, and thereafter benefits will be paid on a sliding scale. Those earning less than R1 000 could receive as much as 60 percent of their income, while those earning R10 000 or more could receive as little as 30 percent. All benefits are paid for a maximum of 182 days a year.
In terms of the BCEA, women are entitled to four months' maternity leave, but, as an employer, you are not obliged to pay her during this time - you only have to keep her job open for her when she returns. This is where unemployment insurance is useful.
If your business is able to, you could make up the deficit between UIF and whatever your employee was earning. The money you save while UIF pays your absent employee can be used to pay the replacement you may need to hire.
Unemployment benefits are also paid to women who adopt children, and these benefits are likely to be extended to either parent of an adopted child in terms of the new Act in April.
Benefits are also paid to the dependants of a deceased contributor.
Contributions to the fund cost one percent of the employee's salary or wages.
Currently, anyone earning more than R93 288 is excluded from contributing to, or claiming from, UIF because, the reasoning goes, they are less likely to lose their employment. The new legislation is likely to raise this threshold.
A big drawback of UIF is that, so far, domestic and seasonal workers have been excluded. The reason for this is the difficulty of collecting contributions from employers, but according to David Khumalo, the deputy director of board and legal services in the unemployment commissioner's office, the new legislation provides for inclusion of these workers from 2003. How this will be done has still to be decided, but it may be that domestic employees will be entitled to benefits without the employer contributing.
Until that happens, the only cover employers of domestic workers can offer is an extension of their own life cover. Consult your financial adviser about making your domestic worker a beneficiary of your life assurance policy. And if you don't already have it, consider organising an income protection plan that will cover you, and in turn your domestic employee, against loss of earnings through illness or disability.
Small business operators must make contributions to the Compensation Fund on behalf of employees. Like UIF, this is a government fund to which employers contribute, this time for cover for their employees against injury in the line of duty, or illness caused by the nature of their work.
Again, domestic employees are excluded, but while the extension of UIF is imminent, an extension to the Compensation Fund has not yet been proposed to Parliament, so any change to the law could be long time coming. If you are running a business and employ staff, you are legally obliged to contribute to the Compensation Fund.
Businesses are rated on the nature of the work the employees do, and the amount you have to contribute depends on this rating. The general principle is that the greater the likelihood that an employee could be injured while working for you, the more you will pay. The lowest contributions are those made by employers in the hairdressing trade, who pay R0.06 cents for every R100 of earnings paid to employees.
At the top end of the scale are employers whose workers engage in blasting or drilling operations, who must contribute R8.26 for every R100 of earnings. In the gardening and plumbing businesses, employers pay R1.59 for every R100 of earnings, while in the catering business, the rate is R0.50 for every R100 paid.
Employees covered by the Compensation Fund are entitled to compensation for temporary disablement that lasts for more than four days, at a rate of 75 percent of their earnings. Employees who suffer permanent disability, where the degree of disablement is 30 percent or less, are entitled to a lump-sum payment based on 15 times the employee's earnings at the time of the accident, as long as their earnings did not exceed R6 110 a month.
Employees who are more seriously disabled are entitled to a monthly pension. The pension is proportional to the percentage of disablement, with the maximum pension for 100 percent disablement set at 75 percent of the employee's earnings.
If an employee dies on duty as a result of an accident, their widow/widower and children receive both a lump-sum payment and a pension.
Until the domestic sector is included in compensation legislation, you could consider commercial insurance. According to Egbert de Waal, Santam's communications manager, the house contents section of Santam's personal policy covers medical expenses not otherwise covered, at up to R2 000 a person. The policy also provides legal liability cover for amounts you might have to pay as compensation for accidental death or bodily injury.
Small businesses can also take out a group personal accident policy. This will provide cover if your employees are disabled, injured or die while working for you.
It's no longer safe for employees to take home envelopes stuffed with cash. Make sure your employee opens a bank account into which you pay all, or part, of his or her wages. If you pay out some cash on payday, pay enough that they won't have to visit the bank or automatic teller machine (ATM) on the same day to make a withdrawal and incur another bank charge.
Also make sure the account suits the purposes for which it will be used, and that your employee understands how it works. A simple savings account, for example, may not be suitable if your employee plans to make numerous withdrawals that will quickly reduce the account to nothing.
For example, with Standard Bank's E-Plan account you can take your balance down to R20, but then your monthly charge will be R8.50, which will rapidly annihilate a R20 balance. You also pay R3.50 for withdrawals up to R100 and if you draw more than that, R3.50 plus 90c for every R100 over the first R100. If your employee tries to withdraw money over the counter at a Standard Bank branch with a balance in the account of less than R5 500, the bank will charge a hefty R25 fee.
If your employee is operating on low margins, a PepBank account may be a better option. PepBank's minimum balance is R10 and its monthly service fee is R3.50. Your employee will pay R1.75 every time he or she makes a withdrawal at a PepBank ATM.
Personal Finance newspaper publishes a review of charges and interest rates every six months, and this is available on www.persfin.co.za. You will also find information about charges and interest rates on Bankmonitor's website - www.bankmonitor.co.za
Employees who aren't living on the breadline should be encouraged to save some of their earnings. The South African Savings Institute says you should explain that having an "emergency fund" of savings is preferable to visiting a loan shark and incurring high interest charges when an employee suddenly needs money. The institute suggests that you pay an employee a bonus relative to what he or she saves.
You can also help your employee with some savvy savings options. Besides simple bank savings accounts, the Savings Institute says there are many group savings schemes that encourage social contact as well as motivate one to save more. A list of these schemes can be obtained from the institute at (021) 670 7849.
If you have a long-term faithful employee, you might consider a savings policy such as Sanlam's Halala Savings Plan. To this you, or you and your employee jointly, could contribute as little as R50 a month. The minimum initial term is 10 years and after 10 years of contributing R50 a month, at six percent rate of growth, your employee's nest egg could be worth R10 765.
A policy such as this one offers an investment in the equity market, which may well outperform the interest rates you would get from savings in a bank account - but don't forget, administration costs and commissions are deducted from a policy.
Another advantage of a policy over a savings account is that there is less temptation to raid it. But, of course, it is still possible to get money out of a policy before its term is up, and you and your employee should be aware that you could lose a lot by doing so.
As a small business operator, you can set up a pension or provident fund for your employees, but because there are administration costs involved, there is a point at which it is not cost-effective.
Derek Smorenburg, of Total Care Strategy, says he advises following the 15:15:15 rule. According to this formula, if you have at least 15 members of staff able to contribute 15 percent of their earnings (part of which may be paid by the employer), and the staff earn an average of R1 500, it is worth your while getting a suitably qualified adviser to help you set up a fund.
Generally speaking, when staff numbers or their earnings/contributions are lower than this, Smorenburg says a pension or provident fund is not a viable option. To set up a fund you need a board of trustees with professional indemnity cover, administrators and the legal services to help you through the legislative requirements, all of which costs money. Smorenburg believes the costs of running a pension or provident fund should not exceed 25 percent of the contributions made to the fund.
He says there are exceptions to his 15:15:15 rule. For example, a one-man business where the sole employee is earning more than R20 000 a month and contributing R4 000 to a retirement fund, would find a pension or provident fund a viable option because costs would be relatively low. Similarly, it could be viable for a business such as a farm, where workers were earning less than R1 500 a month, but there were many more than 15 workers.
Smorenburg says for employers who fail the 15:15:15 test there are few options. He says it is a great pity there is no formal savings scheme in South Africa. In Chile, for instance, he says,the government has enlisted three major insurance companies to run a retirement fund to which everyone who works contributes 14 percent of their income. Chileans cannot access these funds until they go on pension, whereas, in South Africa, employees who are paid out by pension funds when they change jobs frequently squander their pension savings.
It is possible to set up and subsidise a retirement annuity for your employee, but the minimum monthly contributions start at R150 a month. You can keep these premiums level, increase them at a fixed rate, or tie the annual increase to the inflation rate, according to Sanlam's Kobus Engelbrecht.
He says both the up- and the downside of a retirement annuity is that your employee won't be able to get at the money before the age of 55. Even, for example, if the employee lost his or her job at the age of 45 and had a tidy sum in the annuity, the money would not be available.
An advantage of an annuity is that your employee gets a tax benefit by contributing. Contributions made to a retirement fund or retirement annuity up to 7.5 percent of your earnings, or R1 750, whichever is greater, can be deducted from your taxable earnings.
You do need to have some commitment to putting money away in a retirement annuity - the same warnings that apply to other policies apply here. If you have been paying premiums for a long time - the period depends on your premium and the term of your policy - you can stop paying your monthly premium and make your policy paid up, but you cannot stop too early, when the value of your retirement annuity is less than the cost that must be redeemed.
Another good feature of an annuity is that it is portable - your employee can continue it even if he or she leaves you and moves to another job that does not offer a pension or provident fund.
If, however, the new job does have a pension or provident fund and the employee can't afford to contribute to both, the retirement annuity could be worthless, since most of the costs are deducted in the first two years and the paid-up value might be non-existent at the time of cancellation. If the monthly contributions to an annuity are too steep for you and your employee, an alternative is to save this money in a savings or fixed deposit account and feed it into a lump-sum single-premium annuity.
Another good option is to contribute to a unit trust fund. The South African Savings Institute says Liberty's Wealthbuilder series of unit trusts accepts minimum investments of R50 a month. Alternatively, if the unit trust of your choice has too high a minimum investment, save the money in a savings or call account until you have enough for a lump sum investment.
Unit trust investments can be stopped or started at any time, although they are more suitable for investment periods of three to five years, because this should be long enough to smooth out the market's ups and downs and make up for the initial costs of investing in a fund. The disadvantage of this type of investment is that an undisciplined employee can raid this money at any time.
One company benefit you, as a small business or domestic employer, can replicate is offering to help educate your employees' children. Education policies are offered by the big assurers - Old Mutual has one for the benefit of children under the age of 15 that starts at R50 a month. If you increased the amount you paid each year by six percent to keep pace with inflation, and the growth rate on the policy was 12 percent, the policy would pay out R9 700 after 10 years.
There are many such policies available with different price tags to suit different incomes. Again, remember that there are costs and the rate of growth depends on what happens in the markets in which the policy is invested.
Another key to good employee-employer relations is training. An employee who is given a chance to learn a new skill is an employee who believes he or she is valued. The new skill may also add a new dimension to that employee's job, and help prevent him or her becoming bored. Your employee may also value the opportunity to take on new task and possibly more responsibility at a higher wage.
You could also send your employee on courses to improve his or her life skills, and courses that teach basic financial skills could be invaluable. Contact the South African Savings Institute on (021) 670 7849 for information about financial literacy courses.
Salaried employees usually enjoy group life benefits that include death and disability benefits. For R45 a month you could pay for a funeral policy for your employee. If he or she dies while in your employ, you will be able to offer the bereaved family some financial comfort. You could also organise a policy that would pay out if a family member of your employee died.
There are a number of funeral policies on offer - just make sure the policy you take is underwritten by a reputable company, as this market has attracted its share of scam artists. The cost of the cover will depend on the insured person's age and their risk profile. Metropolitan, for example, offers R15 000 of cover for someone aged 19 to 35 years for R45 a month. For R52.50 a month, you can buy a policy that will be considered paid up at the age of 65 - in other words, when the insured person reaches 65, no more premiums are due, but the insured person will still enjoy the cover until he or she dies. A policy that covers your employee's whole family will cost R105.
Metropolitan warns that you must pay premiums for six months before a claim will be paid.
If you have a live-in domestic worker, make sure his or her possessions are covered by your household insurance. If your home burns down, or if you are cleaned out in a burglary, your domestic worker could also lose precious personal possessions.
Santam says domestic employee's possessions are covered by its household contents policies, but this cover is limited to R1 000, or two percent of what your household contents are insured for. Remember that for personal effects to be covered for theft, there must have been a burglary.
Santam's De Waal says that should this cover be inadequate - R1000 may not be enough to cover your domestic's television for example - you can insure your employee's personal effects as a separate item under the house contents section of your policy.
The same security measures and/or other conditions that apply to your home will apply to your domestic worker's quarters.
This is probably one of the most expensive benefits to offer. Contributions to medical schemes start at more than R300 a month. Liberty Healthcare, for example, offers the Provia-silver option. A single member will pay R309 a month to belong to this scheme, which has a low annual maximum medical expense limit of R115 000, according to Andre Loedolff, a consultant for the Managed Group. He says this basic option offers chronic cover of R4 000 a year, crime trauma benefits and cover for all hospital expenses.
You could reach an agreement with your employee whereby you pay a portion of the contribution, for example 50 percent, while they pay the rest from their wages or salary. As a cheaper alternative, you could consider medical insurance that does not cover day-to-day medical expenses, but does cover your employee for certain medical crises, such as a heart attack, or treatments such as chemotherapy.
Loedolff says premiums are based on age. For example, for a monthly premium of about R245 a month, a single, 25-year-old man can take out Liberty Healthcare's Medical Lifestyle insurance. This will cover him for certain medical procedures from day one, pay him a specified daily hospital amount if he needs to spend more than four days in hospital and pay him a chronic benefit for life threatening diseases only. The same cover will cost a 60-year-old man about R700 a month.
Standard Bank has a special credit card, called MediCard, which can be used as a savings account for medical expenses. It is not a medical aid, but as an employer you could consider using the card together with a hospital plan for an employee. You could contribute towards your employee's day-to-day medical expenses by paying straight into the card. The card can be used as a method of payment at most doctors, dentists, optometrists, pathologists and pharmacies.
MediCard works as a debit card when prefunded or, should an individual wish to apply for a credit facility, it can double as a credit card.
You may be tempted to buy a policy as a reward for a faithful employee, but before you do, be sure your employee will definitely be with you for a long time and won't call in this perk before it matures. If you stop the policy before the term is up, especially in the early part of its term, your employee will get very little. Even a few years into the policy, you will pay penalties for early withdrawals. The advantages, of course, are that it forces you to be disciplined about saving - you will have to sign up for a debit order every month and the payout at the end of the term is tax-free. Weigh up the tax advantages against the tax you will pay on a savings account, bearing in mind that the first R4 000 in interest earned on savings is now tax-free.
This article was first published in the 1st Quarter 2002 edition of Personal Finance magazine See what's in our latest issue