Does concealing potential damage caused to an employer constitute dishonest misconduct in terms of section 37D of the Pension Funds Act?
By Anita Roodman, Senior Manager: Governance and Technical
In terms of section 37D(1)(b)(ii), a retirement fund is entitled to deduct an amount from a member’s retirement fund benefit for any damage caused to the employer as a result of theft, fraud, dishonesty or misconduct.
In the Moodley[1] case, the meaning of “misconduct” in the context of section 37D was considered by the court. It was held that the word “misconduct” is restricted to conduct with an element or component of dishonesty.
Retirement funds are often faced with requests from employers to deduct amounts from members’ benefits to compensate for damage where the event causing the damage was as a result of negligence, or breach of contract, policies or procedures. However, such a deduction is not allowed – ordinarily, contractual debts in respect of which the employee still owes a balance to the employer on the date of withdrawal, fall outside the provisions of section 37D and no deduction can be made. The question then arises as to whether this principle would change if the member was dishonest by not disclosing the damage or the cause of the damage.
The dishonest misconduct must have caused the damage
In the 2022 Financial Services Tribunal case of Anderson Transport[2], a member caused damage to his employer through negligent and reckless driving which led to a road accident. The member lied about the reason for the accident and was dishonest in that he knew he was not allowed to drink alcohol while he was on duty, and therefore tried to hide that his misconduct caused the accident.
The Tribunal found that even though the member lied about the reason for the accident, it did not alter the fact that the cause of the employer’s loss was the member’s negligent conduct. The lie did not cause the accident. The accident was caused by his negligent and reckless driving, which does not meet the requirements of section 37D.
It therefore seems that the dishonest behaviour must have caused the damage or additional damage for section 37D to apply and such concealment may constitute misconduct as contemplated in section 37D(1)(b)(ii) if the non-disclosure caused damage.
Earlier case where contractual disputes (including subsequent dishonest behaviour) were ruled out in totality for purposes of section 37D
However, in the Adjudicator determination of De Kock in 2013[3], the member failed or neglected to properly manage or account for stock, which caused damage to the employer. The member therefore failed to meet the contractual agreement with the employer. The member then dishonestly tried to hide the loss, which prevented the employer from taking action to improve profitability and prevent further losses. The Adjudicator held that it was not the intention that section 37D should be extended to contractual disputes, including those of which the failure was concealed as submitted by the employer.
Recent cases where non-disclosure resulted in damage
Two more recent cases relating to erroneous salary payments provide some additional insight:
In the High Court case of Denel Soc Limited t/a Denel Aviation in 2016[4], the member received an erroneous salary overpayment of R1 892 690.36, while he ordinarily earned a basic salary of R10 175.27 per month. By the time the employer realised the mistake and had the member’s bank account frozen, an amount of R716 533.30 had already been withdrawn by the member.
The court rejected the member’s version that he honestly believed the salary payment was correct as the payment correlated with his payslip. He could have, and was supposed to, verify the payment of an amount that was considerably more than his normal salary, but he didn’t notify the employer about the overpayment at any stage.
The court found that he acted in a manner that was less than candid and had been dishonest, so the deduction from his retirement benefit was permitted. One can draw the conclusion that it was the dishonest misconduct of not disclosing the error of overpayment that caused the damage to the employer.
In a similar 2022 Financial Services Tribunal case of GH Forbes[5], the member erroneously received an additional salary for 26 months. The employer suffered a loss of R1 756 072 as a result. The Tribunal found that the payslips clearly showed that the member received a second salary and took no steps to correct it for a period of 26 months. He had a duty arising from common law obligations and the express terms of his employment contract to disclose the overpayments to the employer, which he failed to do. It was therefore found that the member’s conduct contained an element of dishonesty and the provisions of section 37D were met.
Conclusion
Although ordinarily, negligence or breach of contract falls outside the provisions of section 37D, we believe a deduction from the member’s benefit may be permissible where subsequent dishonest behaviour caused damage. For example, if a member caused damage to a company car whilst driving it outside the contractually permitted times, such misconduct will not qualify for a deduction in terms of section 37D. However, if the member does not disclose such damage and such non-disclosure results in an insurance claim being rejected, it is our view that such dishonest misconduct caused the damage and a deduction will be permissible. This is similar to the salary overpayments in the GH Forbes and Denel cases, where the overpayment itself does not qualify as a section 37D deduction, but the subsequent dishonest misconduct causing the damage justifies a deduction.
The board of management of a retirement fund has a fiduciary duty towards the fund and its members and, in exercising its duties, the board is required to scrutinise each request to allow a deduction on the merits of the employer’s claim. In cases of dishonest misconduct, the deduction must be limited to the amount of damage caused by the dishonest behaviour and the balance must be paid to the member as soon as possible.
First published in Pensions World Quarter 1 of 2024
[1] Moodley v Local Transitional Council of Scottburgh Umzinto North and Another [2000] 9 BPLR 945 (PFA) at 951.
[2] Anderson Transport (Pty) Ltd v Skosana and Others (PFA72/2021) [2022] ZAFST 66 (20 June 2022).
[3] PM de Kock v Compass Group Southern Africa Pension Fund and Others PFA/MP/00002506/2013/MR.
[4] Denel Soc Limited t/a Denel Aviation and Another v Mafalo and Another (39859/2015) [2016] ZAGPPHC 284.
[5] Forbes v Old Mutual SuperFund Provident Fund and Others (PFA17/2021) [2022] ZAFST 28 (21 April 2022.)