TAX MATTERS: Covid-19 — Sanitising the employer-employee relations

THE Covid-19 pandemic has significantly affected business and economies the world over. Some companies have been forced to completely close while others have resorted to working virtually due to the national lock downs imposed by most countries in a bid to curb the spread of the virus.
Zimbabwe is no exception to countries that have imposed national lock downs.
Employers have been placed in a dilemma on how to pay their employees particularly for the month of April seeing that there is an ongoing lock down for 21days.
The impacts of the coronavirus are long term, businesses need to be revived after the pandemic has been cleared, but before then most employees will and some have already been affected. In this article we explore the alternative solutions available for employees and possible tax implications therein.
One of the frequently asked questions recently is whether or not the Covid-19 pandemic is a force majeure? A force majeure is defined as an event or effect that can be neither anticipated nor controlled.

Force majeure clauses are defined as contractual provisions that address circumstances in which contractual performance becomes impossible or impracticable due to events that could not have been foreseen, and are not within any of the parties’ control.

It however, does not generally provide for termination of an agreement but generally suspends a party’s obligation to perform under the agreement for the duration of the force majeure event.
With regards to employment contracts, either party can argue that Covid-19 made the fulfillment of contractual obligations impossible.
For instance an employee may argue that performance of duties was made impossible due to the lock down while the employer may also state that they cannot pay the employee salaries because revenue generation was practically impossible during the lock down period. However, if the employment contract still subsists and the employee is rendering services virtually or in whichever manner, the employer is obliged to continue paying salaries during the lock down.

The “no work no pay” principle is triggered in instances where the employee was or is not performing his or her duties, this may still be subject to the notion of practical impossibility mentioned above.

Given this deadlock, both parties must secure a win- win situation and explore different options available.
Employees may go on vacation leave or unpaid leave during the lock down period and this could be a win-win situation for both parties since no duties were performed and no income was generated.
Employers may consider a salary cut in an effort to ensure that it does not retrench any or as many employees, this however, will need to be negotiated by both parties.
In the event that an employee is not agreeable to new employment terms he or she can opt to resign and this will have to be done in terms of the law and the employee will be entitled to an exit package which may be taxable.
As a last resort, businesses may consider retrenching some of its employees.
It is important to note that retrenchment is accompanied by retrenchment packages hence the employee cannot just go empty-handed.
Companies will have to comply with the Labour Act (Chapter 28:01) which details the guidelines to be followed upon carrying out retrenchment.
The Labour Act requires, primarily the employer to report of the intention to retrench to the relevant authorities which may be the works council, employment council or the Retrenchment Board.
This is followed by a report of the employees being retrenched and the reason behind in which case this may be justified considering that the pandemic has significantly affected almost every business nationwide.
In terms of the law, a minimum retrenchment package consists of not less than one month’s salary or wages for every two years of service as an employee (or the equivalent lesser proportion of one month’s salary or wages for a lesser period of service) should be paid by the employer as compensation for loss of employment. Retrenched employees are entitled a tax incentive in the form of an exemption from tax on the retrenchment package.

In terms of the Income Tax Act, a third of the retrenchment package is exempt. However, the maximum exemption is $80 000 and if the package is less than
$50 000 the whole amount is not taxable.
The same is applicable in case of a retrenchment package from the Pension Fund i.e a third of the package is exempt and the maximum of the exempt tax is up to $80 000 while the minimum is $50 000.
This entails that any amount below $50 000 is non-taxable. Pension received by employees above the age of 55 years is also non-taxable.
In a nutshell, employers and employees are left with no option but to go back to the drawing boards and deliberate on decisions that strike a balance between the employer and employees that have not been productive or working during the lock down.
One of the most frequently asked questions during the lock down period is, “What are the implications for employees working from home?” We delve deeper into this issue in or next publication.