Tuesday, July 31, 2012

Employers invest significant resources in their employees and they accordingly place much value and trust in them.
For this reason, fraud or theft perpetrated against an employer by one of its trusted employees is unpalatable and indeed, unacceptable – to an employer. In almost every case, by the time the fraud, theft or misconduct is detected, the employer has already suffered a considerable loss.
Although employers are often quick to investigate the circumstances surrounding fraud, theft or misconduct perpetrated against the company, employers tend to be hesitant to initiate civil proceedings against guilty employees out of concern that the employee would not have sufficient assets to satisfy any judgment that is ultimately obtained.
The employer's concern over throwing good money after bad is often well-founded where the guilty employee has squandered the misappropriated funds.
There is, however, a remedy available to an employer in this position. Section 37D(1)(b) of Pension Funds Act 24 of 1956 (PFA) provides an employer with a remedy to recover the losses suffered as result of a fraudulent employee by requesting the Pension Fund Administrators to withhold the employee's pension benefits.
The principal benefit of withholding an employee's pension benefits in terms of section 37D(1)(b) is that an employer is reasonably assured that there will be an asset aginst which to execute once judgment is ultimately obtained.
The general rule in terms of section 37A of the PFA is that pension benefits belong to a member and they shall not capable of being reduced, transferred, ceded or be liable to be attached for execution. Section 37D(1)(b), which permits a Fund make a deduction from an employee's benefit to settle a debt owing to the employer, is an exception to the general rule.
Section 37D(1)(b) provides:
A registered fund may- (a) ...
(b) deduct any amount due by a member to his employer on the date of his retirement or on which he ceases to be a member of the fund, in respect of-

(i) (aa) ...

(ii) compensation (including any legal costs recoverable from the member in a matter contemplated in subparagraph (bb)) in respect of any damage caused to the employer by reason of any theft, dishonesty, fraud or misconduct by the member, and in respect of which-

(aa) the member has in writing admitted liability to the employer; or

(bb) judgment has been obtained against the member in any court, including a magistrate's court, from any benefit payable in respect of the member or a beneficiary in terms of the rules of the fund, and pay such amount to the employer concerned;

Before a Fund deducts or withholds a member's benefits on behalf of an employer, it must ensure compliance with the following conditions:

There must be an amount due by a member to his employer on the date of his retirement or on which he ceases to be a member of the fund;

The amount must be for compensation in respect of any damage caused to the employer; The damage caused to the employer must be by reason of theft, dishonesty, fraud or misconduct by the member;

The member must either admit liability in writing to the employer or judgment must be obtained in any court;

The judgment or the written admission of liability must be in respect of the compensation of the damage caused.

If the above conditions are met, the Fund may deduct from the member's benefits the amount due to the employer.
The word "may", used in section 37D(1)(b), means that the Fund has a discretion to make a deduction. The Fund is not obliged to do so even where all the conditions of the section are met.
The damage caused to the employer must be by reason of theft, dishonesty, fraud or misconduct by the member. There has been some uncertainty as to meaning of the word "misconduct" in the context of the section.
In the case of Moodley v Scottburgh/Umzinto North Local Transition Council and Another [2000] 9 BPLR 945 (PFA), it was held that "misconduct" must be interpreted in light of the words "theft, dishonesty and fraud" that precede it. Therefore, to use the word "misconduct" there must have been an element of dishonesty.
Section 37D(1)(b) refers to a Fund's discretion to make a deduction on the strength of a written admission of liability or a judgment by any court of law, including a magistrate's court.
The judgment must either be a civil judgment sounding in money; alternatively, a compensatory order made in terms of section 300 of the Criminal Procedure Act 51 of 1977, specifically allowing compensation to the employer.
In Buthelezi v Municipal Gratuity Fund and Another [2001] 5 BPLR 1996 (PFA), it was held that only deductions prescribed by the PFA would be allowed and that a judgment from a criminal court of a criminal conviction was not a judgment as required by section 37D(1)(b).
Whislt default judgment was found to satisfy the requirements of section 37D(1)(b) in Absa Bank Limited v Burmeister and Others [2004] 4 BPLR 5575 (SCA).
Default judgments may satisfy the requirements of the section there is always a possibility that an employee may apply for the rescission of the judgment where that judgment was taken without the employee's knowledge. At that stage the Fund could have deducted the member's benefits in favour of the employer. It is not often that a member admits liability for damage caused to an employer – which then leaves an employer with only the option of obtaining judgment against the employee. A challenge faced by an employer is the delay in obtaining judgment against an employee, especially where court proceedings are opposed by the employee.
Note that section 37D(1)(b) does not specifically grant a Fund the power to withhold a member's benefits. Furthermore, difficulties were encountered where Fund Rules did not make provision for the withholding of pension benefits pending the determination of the employee's liability to the employee.
Until the judgment in Highveld Steel and Vanadium Corporation Ltd v Oosthuizen [2009] 2 All SA 225 (SCA), there had been uncertainty as to whether a Fund was entitled to withhold payment, especially where there had been no written admission of liability by a member to an employer or where an employer had not yet obtained judgment against the employee. It has been stated in many judgments that the purpose of section 37D(1)(b)(ii) is to protect the employer's right to pursue the recovery of money misappropriated by its employees. In the Highveld case the court held that to give effect to the purpose of the section, which is to protect an employer's right to recover money misappropriated from it, the wording must be interpreted to include the power to withhold payment of a member's benefits pending determination or acknowledgment of the member's liability.
Following the Highveld judgement, Funds amended their rules to make provision for withholding a member's benefits pending determination of a member's liability to the employer. Notwithstanding the provision, a Fund may still exercise its discretion on whether or not to withhold a member's benefits.
The reality is that an employee subsequently found innocent would have been prejudiced while the Fund withheld his/her pension benefit.
Therefore, in exercising its discretion a Fund must act with care and reasonableness and, as held in Highveld, balance the competing interests between the parties having regard to the strength of the employer's claim.
To achieve reasonableness and before withholding or deducting a member's benefits, a Fund must be satisfied that:

the employer has made out a prima facie case against the member and that there are reasonable chances of success in the proceedings; the employer is not at any stage responsible for any undue delay in the prosecution of the proceedings. Whilst withholding the pension benefits, a Fund must review the matter and consider the time taken to finalise matters. If the time taken to finalise matters is unreasonable and the employer has not taken such further steps to ensure that the matter is finalised, the Fund must release the pension benefits to the employee (Maritz v Bidcorp Group Retirement Fund and Another [2011] 1 BPLR 118 (PFA).

Section 37D(1)(b) contains strict requirements, which must be complied with before a Fund may deduct or withhold a member's benefit.
Funds have become stricter – quite reasonably so – and will not easily make deductions or withhold a member's pension benefits in the absence of strict compliance with the section 37D(1)(b) and its Rules.
This makes it even more important, that an employer acts promptly in conducting an investigation, and in instituting proceedings against a suspected employee as soon as fraud has been detected.
Prompt action will not only satisfy a Fund as to the employer's determation to prosecute the matter without delay; it will also send a decisive message to the rest of the organisation about the employer's stance on fraud.