The Employerʼs Guide to Garnishee Orders
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Preamble It is widely accepted that access to and use of credit plays an important role in the ability of consumers to acquire assets and improve their standard of living. In this regard the National Credit Act provides a new regulatory framework that aims to unlock the economic potential of all South African consumers by increasing access to credit, while recognising the dangers associated with over-indebtedness and the injudicious use of credit. The Minister of Trade and Industry pointed out that the credit market that developed over the past decades is inappropriate for the present economic and social context of South Africa. It is a market that both reflects and reinforces the two economies of South Africa one economy is modern, globally integrated and producing most of the countyʼs wealth, the other characterised by underdevelopment and structurally disconnected from the first and the global economy. It is furthermore a market that is characterised by a lack of transparency, limited competition, the high cost of credit and limited consumer protection. According to the Department of Trade and Industry, the consumer credit market in South Africa is worth some R361bn and comprises some 20 million accounts. However, this market is distorted by the fact that most low income consumers only have access to very expensive credit. After 12 years of democracy: 67% of the population receives less than 6% of credit extended 22% of small and medium enterprises receive financing (only 7% from banks) The lowest income group faces the highest cost of credit (an average of 175% per annum per loan) The credit market is effectively split between super-included and super-excluded In the context of the above, it often happens that employees are not able to service their debt on an ongoing basis as they are overextended in terms of the total payments that need to be made. This in turn results in too little expendable income. As a result, we at FIHRST Management Services (FIHRST) have seen a massive growth in debt related judgments against employees and the issuing of thousands of Emolument Attachment Orders (EAO) to employers. This stretches the capacity of payroll departments, placing them in the onerous position of having to administer these orders. FIHRST, as one of the largest payroll payment service providers in the country is uniquely positioned to see just what an impact the administration of these EAOs is having on both employers and employees alike. In this regard, we have received numerous requests for clarification on various elements of EAOs from our clients. This document is structured in such a way so as to address the most frequently asked of these questions. As many of these questions are complex not only in terms of the question itself but the potential answers, FIHRST has worked with Deloitte to try to unpack the rules and procedures pertaining to EAO and to explain the rights and obligations of all parties involved. This booklet is the result. 1
Marketing and Advertising T h e C r e d i t C y c l e Application for credit Termination Credit assessment and pricing Monitoring Notes
Purpose of the booklet This booklet explains EAOs and what employers could choose to do in terms of receiving the EAO, checking elements of the order itself and the on-going administration of the salary or wage deduction as required by the EAO. Various role players within the industry and legal experts were consulted in preparation of this booklet. There seems to be a number of grey areas with regard to the implementation of the law (due to the different jurisdictions of the Magistrate Court applying different rules, the practical implementation of these rules sometimes leads to uncertainty). Be that as it may, in this booklet we share our understanding of elements of EAOs and try to provide employers with practical suggestions and possible steps that employers may take to, not only assist employees but also to minimise any potential risk to the employer. Employers should bear in mind that it is in the best interest of the employee that the employer processes the EAO as soon as possible. This could ensure that no unnecessary costs or interest accrues to the employee. The discussion of EAOs in this booklet does not apply to EAOs related to, for example, maintenance orders, tax, debt administration orders and specific legislation dealing with EAOs. In each of these instances, special rules apply and employers should seek legal advice as to how to deal with these orders. We must stress that the application of the laws governing debt and debt enforcement are complex and whilst the purpose of this booklet is to educate employers and provide practical suggestions regarding EAOs, each EAO has a unique set of circumstances and general assumptions should not be made. We would urge all the parties involved in the administration of EAOs to obtain legal and/or other advice prior to embarking upon any course of action. In addition, EAOs are orders of the court with which employers must comply. This booklet does not provide, or should not be understood to provide legal advice. What is an EAO? EAOs generally arise at the end of a credit cycle. A credit cycle is the entire process from the time that the credit provider extends the credit to a debtor (employee) through to debt enforcement, which arises when the employee (in our instance) is in default. In general terms, debt enforcement proceedings are based on the agreement entered into between the credit provider and the employee i.e. the contractual arrangement in terms of which the employee agreed to repay the amount of credit extended 2
Notes...a prescribed affidavit is filed with the Clerk of the Court
by the credit provider, together with interest, costs and fees, in instalments over a period of time, as well as the process to be followed where the employee has not met the commitments in terms of the agreement. At some point in time, during the life of the agreement, the employee would have fallen behind or simply stopped meeting the schedule of payments, resulting in the credit provider having to take steps to recover the debt i.e. debt enforcement proceedings would have commenced. It is important to note that credit providers generally resort to obtaining an EAO where an employee is in default in terms of their agreement to repay, all other debt enforcement procedures (such as attachment of the employees movable property - TV, furniture, car, etc) have been exhausted. The terms ʻEAOʼ and ʻgarnishee orderʼ are sometimes used interchangeably. This is so because an EAO is a specific type of garnishee order. EAOs, in essence, attach a portion of the salary or wage (emoluments) of the debtor (employee) in terms of Magistrate Court procedures, the objective being that a credit provider is able to collect a portion of the debt owed by the employee, on a monthly or weekly basis. The employer, in turn, is obliged to pay the amounts so deducted from the employee to the credit provider or their attorney. These payments will then be deducted from the employeeʼs outstanding debt. An EAO may generally be issued: Where a judgment had been obtained against the employee for the debt in question (judgment debt) All other debt enforcement procedures have already been exhausted Any of the following 3 requirements are present: 1. 2. 3. The employee has consented (in writing) The court has authorised the EAO (this would be the case where the court has specifically sanctioned the order in proceedings before it, or where the court has indicated that an EAO should be enforced as part of debt administration in terms of an administration order, i.e. where a person is placed under administration by a court) The credit provider or their attorney has sent a registered letter to the employee setting out the amount of the judgment debt and costs and warning them that an EAO will be issued if the amount is not paid within a certain period (usually 7 days), the employee has not responded to the letter and a prescribed affidavit is filed with the Clerk of the Court It should be noted that the court always has the right to require that the employee appear before it so as to inquire about the financial situation i.e. in order to determine how much should be deducted from the salary this can be done to ensure that the employee would have enough salary left (after the deduction) for basic living expenses. 3
Notes...employeeʼs salary or wage which is paid to the credit provider...
An EAO is an order of the court attaching a portion of an employeeʼs salary or wage which is paid to the credit provider or its attorney in reduction of a debt owed by the employee. Deliver y of the EAO EAOs should be delivered by the Sheriff of the Court. When an employer receives the EAO, it can take the following steps: It can ask the Sheriff to produce identification It can check that it was issued by the Clerk of the Court (their dated stamp must be on the document and the stamp must reflect the court out of which the EAO was issued). If there is no Clerk of the Court stamp then the employer or the employee could consider checking with the Court whether the order was issued (the EAO should state the name of the relevant Court, with jurisdiction, at the top of the order, for example Magistrate Court of Randburg ) It can check whether the EAO was issued within the jurisdiction of the employerʼs business If any of the above does not seem to be in order, the employer should seek legal advice on how to proceed. Verify that: EAO is served by the Sheriff Order has the stamp of the Clerk of the Court Order has been issued out of the correct jurisdiction Verifying aspects of the EAO As EAOs are issued in terms of prescribed procedures, the employer can verify a number of procedural aspects of the order: The order should state the outstanding amount Deductions to be paid by the employer (in relation to the employee) must be specified, until such time as the debt and costs have been paid in full The timing of the deductions from salaries and wages must be specified i.e. on what day of the month or week the deduction must be effected 4
Notes Consult the employee
The employer can check the order, for example, verifying that the instalments payable have been set out, the amount relates to the judgment obtained, and when the deductions must be made from the salary or wage. When dealing with an EAO the employer should keep in mind that credit providers can sell a portion of their defaulting book (debts owed to the credit provider in terms of credit agreements) to a debt collector. This means that even though your employee entered into an agreement with a particular credit provider, the name of the credit provider on the EAO may be different. The employer, as garnishee, would be entitled to query any of these types of issues with the credit provider, their attorney or debt collector. Consult the employee The employer may wish to consult with the employee in order to: Verify the existence of the debt - ask for a copy of the credit agreement to validate, for example: The principal debt Costs which may be levied in terms of the agreement Interest Inform the employee of the EAO and its effect, including the amount that will be deducted from the employeeʼs salary Ask the employee for a copy of the credit agreement to verify the interest rate, fees and costs as set out in the agreement. Amount of debt as reflected in the EAO Since an EAO will be served only towards the end of the debt enforcement process, the outstanding amount could be higher than the amount of the original debt. The reason for this is the fact that the credit provider charges interest on the outstanding amount, incurs costs in managing the account and also incurs costs to enforce the debt. All of these costs and interest will be added to the original debt. Employers can ask the credit provider, the attorney or debt collector to furnish a copy of the statement of account in order to verify whether interest, costs and fees have been calculated correctly, for example how the amount of the judgment debt was initially determined, the cost and fees that accrue on a monthly basis, and the enforcement costs. 5
Process the order as soon as possible to avoid unnecessary interest, fees or costs Notes
Certain of these fees and costs must be based on prescribed tariffs whereas others should be based on the original contract between the credit provider and the employee. In certain instances it is permissible for the credit provider, attorney or debt collector to charge for these statements of account and this should be borne in mind when requesting statements. Processing the EAO EAOs may not specify when the first instalment must be deducted. If this is the case it is common practice that the deduction takes place in the month following the serving of the EAO i.e. if the employee is salaried and paid at the end of a month. Thus, if the EAO was served in August, the first deduction would be at the end of September. If the wage of the employee is paid weekly, then the first deduction by the employer would normally be at the end of the second week of the following month in which it was served. It is advisable to process the order as soon as possible to avoid unnecessary interest, fees or costs. On-going management of t he EAO If the employer wants to track the payment of the deductions against the outstanding debt of the employee, the employer may request the credit provider (preferably in writing) to provide a statement containing particulars of all the payments received and the balance owing. The employer can verify whether the statement is correct in terms of for example, assessing whether the balance outstanding has been calculated correctly, the fees and/or charges are in accordance with prescribed tariffs and whether all payments have been correctly allocated. How do you know when to stop deducting? It is our view that employers should comply with the requirements of the order in terms of the number of deductions to be made. The number of deductions to be made cannot generally be determined with ease from the order itself. This is because an order can say that RXX.XX must be deducted from the employeeʼs salary until such time as a sufficient amount has been paid to satisfy a judgment/order of RYY.YY plus interest at Z% and costs. This means that while the deductions from the salary are being made, interest and costs continue to accrue, making it difficult to reach a finite amount to be paid by the employee.this is illustrated in the example overleaf. To assist them in this regard, employers may request a statement from the credit provider towards the end of the payment term to determine exactly when deductions should stop. In addition, it should be noted that under certain EAOs, the employer may in fact not stop paying, for example where an administration order is in place. 6
Notes Employee does not have sufficient funds
Example for purposes of illustration only: Employee A owes the credit provider B R1000, and an EAO is served on employer C to deduct R100 per month until the debt is paid. If no interest, fees or costs are payable, then hypothetically B will deduct 10 payments of R100 to pay off the debt of R1000. The levying of interest, fees and costs will impact on the amount that is ultimately paid and the period. Therefore, a deduction of R100 would be allocated towards, for example: R5 (5% to which the employer is entitled for processing the payment) R10 (10% to which the credit providerʼs attorney is entitled) R5 (5% per month interest payable on a short term loan - 60% per annum) R10 (any other fees or costs) This means that of the first deduction in month 1, of the R100 deduction, only R70 will be applied by the credit provider in reducing the R1000 outstanding debt. The employee will now owe R930. In month 2, the deduction will include the same costs, but interest will be slightly less (interest will now be calculated on the outstanding R930). Do you have to notify the debt collector when you are unable to comply with the order? Employer stopped paying because the employee resigned. In order to manage its risk, the employer should inform the credit provider or debt collector that the employee resigned and as such the employer is no longer able to comply with the order. Although the responsibility is on the employee to advise the credit provider when he resigns, it is in the employerʼs best interest to keep the credit provider informed. This may prevent unnecessary legal action. Once the credit provider is informed, he would then serve a certified copy of the order on the new employer together with the prescribed affidavit, setting out the payments received since the date of the order, the costs incurred since the date of the order and the balance outstanding. The new employer is then bound to comply with the order Employer not able to pay for some other reason. Where the employer is unable to comply with the EAO (for example where there are insufficient funds available) the employer should notify the credit provider or its attorney to avoid possible legal action for non-compliance Employee does not have sufficient funds. In certain circumstances, the EAO can be rescinded (withdrawn or overturned) or the amounts can be changed where the amount deducted would mean that there are insufficient means to maintain the employee or the family. The employee will have to apply for a rescission or amendment of the order. This would however, result in further court proceedings which could entail that further costs are incurred 7
Notes Educate their employees regarding the cost of credit
Who can an employer contact regarding any issues? As mentioned above, legal advice should be sought in relation to any concerns or issues that employers may have regarding EAOs. In addition, employers could consider contacting: The Association of Debt Recovery Agents: www.adraonline.co.za The Debt Collectors Council: www.debtcol-council.co.za The relevant law society of the province within which the attorney operates The National Credit Regulator: www.ncr.org.za Risk management and social responsibility It is up to each employer to assess the level of engagement with employees around EAOs, whether this is from a social responsibility or risk management perspective. In this regard, employers could choose to, for example: Educate their employees regarding the cost of credit. If employees are able to understand the full implications of the risks and costs associated with credit, it is easier for them to make a more informed decision whether or not they should enter into a credit agreement. The provisions of the National Credit Act with regard to the prevention of over-indebtedness and reckless credit are intended to assist in this regard (in terms of these provisions, credit providers will be obliged to determine whether a consumer will be able to afford the credit, before they enter into an agreement) Employees may benefit from education on consumer rights and the consequences of not responding to debt enforcement proceedings instituted by a credit provider. Examples are as follows: 1. 2. Employees could be encouraged to negotiate repayment plans with the credit provider directly. This could mean that employees start meeting their obligations earlier and therefore costs and interest could be greatly reduced In terms of the National Credit Act, where an employee is experiencing financial difficulty, the employee may voluntarily approach a debt counsellor who would be able to assist with the rescheduling or rearrangement of their debt. A debt counsellor will enter into negotiations with all of the consumerʼs credit providers in an attempt to agree and arrange for a debt repayment plan. This plan may include longer repayment periods and/or lower monthly payments. This can take place long before enforcement proceedings actually commence 8
Ultimately, through education on the risks and benefits of credit, employers can potentially play a major role in improving employeesʼ understanding of personal financial matters and help them gain greater control over their financial affairs Notes
3. 4. In terms of the pre-debt enforcement provisions of the National Credit Act, credit providers may not start debt enforcement proceedings unless they inform consumers of their right to consult a debt counsellor, alternative dispute resolution agent, or an ombud regarding the debt in question. Therefore, employees should be encouraged to take heed of these proposals when receiving mail from the credit provider and to take the necessary steps provided for in the National Credit Act Their rights and obligations under EAOs should be explained Conclusion EAOs, in our experience, can pose a dilemma for employers who may see their employee struggling under severe financial burden but are unsure of how to assist and to what level they should involve themselves in their employeeʼs personal financial affairs. We believe that in many cases, assistance for employees who already have EAOs could really only revolve around processing payments in terms of the order as quickly as possible. The implementation of the National Credit Act will have a direct impact on debt enforcement. The mere fact that employees will be entitled to consult a debt counsellor prior to the normal debt enforcement process could potentially contribute to the reduction in the number of EAOs in the longer term. In this regard, the debt counsellor will negotiate with all the employeeʼs credit providers and design a repayment plan that will be acceptable to all parties. In such an instance, credit providers wonʼt have to employ traditional debt enforcement procedures (culminating in an EAO) to recover outstanding debt. As can be seen in this document, the issues pertaining to the administration of EAOs are complex. As such, when you as the employer have to deal with an EAO, the following 3 points are important: Generally, this is a court order with which the employer has to comply. Should you have any queries on either the process followed, or the content of the order, you should seek legal advice as to how to proceed It is in the best interest of the employee that the employer processes the EAO as soon as possible. This will ensure that no unnecessary costs or interest accrue to the employee Although there are strict rules with regard to the issuing of EAOs, the practical application of the process may differ in the various magisterial court districts. The employer should ensure that it is aware of special requirements of the court within its jurisdiction Ultimately, through education on the risks and benefits of credit, employers can potentially play a major role in improving employeesʼ understanding of personal financial matters and help them gain greater control over their financial affairs. 9
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