IMPORTANT FACTORS TO CONSIDER WHEN GRANTING STAFF LOANS

Providing staff loans is a widespread practice across South African workplaces, however, it entails specific legal and financial obligations that employers must carefully navigate.

Since 11 November 2016, the rules around registering as a credit provider in South Africa have changed drastically. Following an amendment to the National Credit Act (NCA), individuals or entities offering loans, irrespective of the loan value, could now be obligated to register with the National Credit Regulator (NCR).

Previously, registration was only needed if:

• You had 100 or more active credit agreements, or

• The total loaned amount (principal debt) exceeded R500,000

These thresholds have now changed:

• The first requirement has been removed

• The second threshold was reduced to R0—meaning even a single loan of any value could trigger registration

Key Questions to Consider Before Offering Credit

To determine whether NCR registration is legally required, ask:

1. Does the NCA apply to this type of transaction?

Some credit agreements may fall outside the Act, for example, business-to-business deals involving large juristic entities.

2. Are any exceptions listed in the NCA relevant?

The NCA doesn’t apply if the borrower is a juristic person (e.g. a company or trust) with assets or turnover above R1 million, based on criteria set by the Minister.

3. Is the credit agreement made “at arm’s length”?

The law looks at whether both parties are independent and not closely connected (e.g. an employee borrowing from their employer might not be dealing at arm’s length).

4. Is the agreement concluded or effective within South Africa?

If the credit transaction takes place, or has legal effect, inside the Republic, it likely falls under South African law.

5. Is this an “incidental credit agreement”?

If the credit arises from delayed payments on normal accounts (like a late invoice), registration is not required.

Consequences of not Registering

If someone fails to register when required:

• The credit agreement may be declared invalid and unenforceable

• The credit provider cannot rely on the agreement to recover funds

Impact of Employer-Employee Loans Under the Revised NCA Threshold

Zero registration threshold under the National Credit Act (NCA) requires any party offering credit, regardless of the loan amount, to register with the National Credit Regulator (NCR).

Does the NCA Apply to Employer-Employee Loans?

The NCA governs all credit agreements that:

• Are executed or take effect within South Africa, and

• Are entered into by parties acting at arm’s length, meaning, they operate independently and aim to secure the best outcome for themselves.

A transaction qualifies as a credit agreement under the Act if:

• Payment is deferred, and

• Interest, fees, or charges are applied

When it comes to employer-employee loans, questions often arise about whether such deals are truly at arm’s length. After all, the employment relationship creates a built-in dependency.

However,

Interest or Fees Trigger the Act

If no interest or fees are charged, the loan:

• May be viewed as not at arm’s length, and

• Likely falls outside the scope of the NCA

But once any charge, fee, or interest, even nominal, is added:

• The agreement is automatically subject to the NCA

• The employer must register with the NCR

• Several obligations kick in, including:

o Creditworthiness checks to avoid reckless lending

o Pre-agreement disclosures so the employee understands the costs, terms, and risks

Examples of Employer-Employee Loans

• Salary advances

• Structured staff loans

These may seem informal or low risk, but even a symbolic interest rate triggers full compliance with the NCA.

Does the Employer Benefit? The Arm’s-Length Test

According to the NCA:

• If an employer lends without interest or fees, it is not seeking financial gain, so it is likely not an arm’s-length deal

• If any monetary benefit is charged, the transaction is presumed to be at arm’s length, and is regulated accordingly

Even if the employer argues that nominal interest doesn’t offer real advantage, courts and the NCR view any charge as sufficient to classify the loan under the Act.

Key Considerations When Issuing a Staff Loan

In South Africa, it is lawful for employers to extend loans to employees, provided:

• No profit is made from the loan, and

• No interest or fees are charged

To protect both parties and ensure compliance, it’s advisable to formalise the arrangement with a clear, written loan agreement.

This should include:

1. Employee's full name and ID number

2. Date the loan was issued (day/month/year)

3. Loan amount

4. Purpose or reason for the loan

5. Eligibility confirmation (criteria used to assess approval)

6. Supporting documents, if required, to justify the loan request

7. Repayment terms—number of monthly instalments; Include terms for loan recovery if employee exits the company

8. Salary deduction clause—confirming that repayment will be deducted from the employee’s salary until the full amount is settled

Section 34 of the Basic Conditions of Employment Act:

If an employer provides a loan to an employee and wishes to recover it through salary deductions:

a) The loan agreement must be in writing

b) The employee must explicitly agree to the deduction in writing

c) The amount of the deduction must be specified

Even with written consent, deductions cannot:

a) Exceed one-quarter of the employee's remuneration in money

The agreement should be signed by both the employer and the employee, setting out the terms in plain language and ensuring that both parties understand their respective responsibilities.

Employers are therefore advised to exercise caution when applying fees, charges, or interest to internal loan agreements, as this may inadvertently trigger compliance obligations under the NCA. Such arrangements should be carefully structured to reduce the risk of falling within the Act’s regulatory ambit.

Importantly, even interest-free loans require careful consideration. In instances where no interest is charged, the South African Revenue Service (SARS) may intervene, potentially viewing the transaction as a taxable benefit. To mitigate this risk, parties entering into interest-free loan arrangements should apply for a formal Tax Directive to avoid unforeseen tax liabilities and penalties.