Treasury Found 16 Municipalities Across the Country Pocketed Workers' Pension Monies

National Treasury has revealed that 16 South African municipalities unlawfully withheld pension, Unemployment Insurance Fund (UIF), and Pay-As-You-Earn (PAYE) deductions from their employees' salaries. This finding is a significant factor behind Treasury's decision to temporarily withhold R13.5 billion in July equitable share transfers from 69 municipalities nationwide, citing persistent and serious non-compliance with the Municipal Finance Management Act. The practice of diverting statutory deductions exposes municipalities and their officials to severe legal and financial repercussions, including personal liability for accounting officers and potential criminal charges, underscoring a critical breakdown in financial governance within the local government sphere.

The recent announcement by National Treasury, revealing that 16 municipalities across South Africa failed to remit pension, Unemployment Insurance Fund (UIF), and Pay-As-You-Earn (PAYE) deductions already taken from workers' salaries, has sent ripples through the local government sector. This alarming discovery is a primary reason behind Treasury's decision to temporarily withhold R13.5 billion in July equitable share transfers from a total of 69 municipalities nationally, citing persistent and serious non-compliance with financial regulations.

This development highlights a profound breach of statutory obligations and fiduciary duties, as these deductions are not municipal funds but monies held in trust for employees and the South African Revenue Service (SARS). The diversion of these funds not only undermines workers' rights and financial security but also exposes municipalities and their accounting officers to significant legal and financial risks. This article delves into the legal framework governing these deductions, the consequences of non-compliance, and the implications for practitioners navigating the complex landscape of municipal finance and labour law in South Africa.

The legal framework governing employee deductions in South Africa is robust, placing clear obligations on employers, including municipalities. For pension contributions, the Pension Funds Act 24 of 1956 (PFA) is paramount. Section 13A of the PFA mandates employers to pay both employee and employer contributions in full and on time, specifically within seven days after the end of the month to which the contributions relate. Failure to do so can lead to significant penalties, including interest on late payments.

Similarly, the Unemployment Insurance Act 63 of 2001 (UIA) and the Unemployment Insurance Contributions Act require employers to deduct 1% of an employee's gross salary and contribute an additional 1% themselves, remitting these funds to SARS or the UIF offices within seven days after the end of the month. The Income Tax Act 58 of 1962 governs PAYE, obliging employers to deduct income tax from employees' remuneration as it is earned and pay it over to SARS monthly. Non-compliance with PAYE obligations is considered a criminal offence, carrying severe penalties including fines, interest, and even imprisonment.

National Treasury's power to withhold funds from municipalities stems from section 216(2) of the Constitution of the Republic of South Africa, 1996, read with section 38 of the Local Government: Municipal Finance Management Act 56 of 2003 (MFMA). The MFMA is the cornerstone of financial management in local government, aiming to secure sound and sustainable management of municipal financial affairs. Treasury's action is described as a corrective, rather than punitive, measure intended to instil fiscal discipline and ensure public money is properly managed, particularly in addressing unauthorised, irregular, fruitless, and wasteful expenditure.

The core issue at hand is the unlawful appropriation of funds that, by law, do not belong to the municipalities. As the South African Local Government Association (SALGA) spokesperson, Motalatale Modiba, rightly stated, pension, UIF, and PAYE deductions are employee monies and their use for any other purpose undermines workers' rights and exposes municipalities to considerable legal and financial risk. This diversion constitutes a serious breach of trust and statutory duty.

The legal consequences for such non-compliance are multifaceted. Under the PFA, municipal managers and other officials involved in financial affairs can be held personally liable for unpaid contributions. This was starkly demonstrated in cases such as *Municipal Workers' Retirement Fund v Mafube Local Municipality and Others*, where the Free State High Court held the Municipal Manager, Chief Financial Officer, Executive Mayor, and Administrator personally liable for the municipality's prolonged non-payment of retirement fund contributions, ordering them to pay over R14 million with interest. The court emphasised that financial distress is not a defence for failing to meet these statutory obligations, a principle reinforced in *Engineering Industries Pension Fund v Installair (Pty) Ltd and Others*.

Beyond personal liability, municipalities face criminal sanctions for non-remittance of PAYE, as stipulated in the Income Tax Act. The PFA also provides for severe penalties, including fines of up to R10 million and imprisonment for up to 10 years for municipal managers who fail to remit pension contributions. The withholding of equitable share transfers by National Treasury, while framed as a corrective measure, serves as a significant financial penalty, impacting the ability of municipalities to deliver basic services if not resolved promptly.

It is crucial to distinguish these statutory deductions from other forms of deductions from employee salaries. While deductions for services or other debts generally require employee consent or a court order, as highlighted in cases like *Siwela v City of Tshwane Metropolitan Municipality and Others* and *Gqithekhaya and Others v Amathole District Municipality*, the remittance of pension, UIF, and PAYE is a non-discretionary statutory obligation. The failure to remit these funds signifies not merely poor financial management but a fundamental disregard for the law and the financial well-being of employees. SALGA's stance of zero tolerance for such financial misconduct and its call for accountability from councils and accounting officers further underscore the gravity of the situation.

The National Treasury's intervention, prompted by the egregious failure of 16 municipalities to remit statutory employee deductions, serves as a stark reminder of the critical importance of financial governance and compliance in the public sector. The legal framework is clear: pension, UIF, and PAYE deductions are trust monies, and their misappropriation carries severe consequences, including personal liability for officials and potential criminal charges. This situation necessitates immediate and decisive action from municipal leadership to rectify past non-compliance and implement robust internal controls to prevent future occurrences.

For legal practitioners, this development underscores the need to advise municipal clients on strict adherence to statutory payment deadlines and the profound personal risks faced by accounting officers and other officials involved in financial management. It also highlights the growing trend of regulatory bodies, like National Treasury and the Financial Sector Conduct Authority, taking firm action against non-compliant entities. Practitioners should monitor ongoing Treasury oversight, the resolution of withheld funds, and potential further enforcement actions, as these cases will likely set precedents for accountability in municipal finance. The imperative for municipalities is not merely to comply, but to cultivate a culture of fiscal discipline and transparency to safeguard public funds and, crucially, the financial futures of their employees.