3. Travel Compensation and Package Structuring
A discussion of the principles of package structuring must start with the labour law concept of remuneration.
The BCEA defines remuneration to be the amount paid in cash or in kind in return for one person (the employee) working for another (the employer). Payments in cash are obvious, and payments in kind are employer-paid contributions to medical schemes, retirement funds, funeral schemes, etc., as well as benefits in kind.
By definition, allowances are not BCEA remuneration. Allowances are payments made to allow work to be done, not in return for work done. Therefore, in labour terms, allowances cannot be a component of a package.
The employer and the employee agree (usually contractually) on the services that the employee will provide to the employer, and they further agree on the remuneration that the employer will pay in return for his services rendered. This remuneration is then the employee’s package.
The purpose of a ‘package’ is therefore to reward the employee for his services.
The purpose of business travel compensation is to compensate an employee who has incurred the employer’s business travel expenses. Therefore, the supply of a company car (which could be only for private travel), the granting of a travel allowance or the payment of a travel reimbursement, compensates the employee for incurring the employer’s business expense.
In principle this is a reimbursement of business expenses incurred by the employee. Reimbursements are not remuneration, and therefore don’t belong in a package structure. Travel compensation should be paid ‘on top’ of the package, along with variable remuneration such as commission and overtime, and statutory costs such as UIF, SDL and OID).
In principle then, company cars, travel allowances and travel reimbursements cannot be included as a component of the employee’s package otherwise the employee would be paying the employer’s expense out of his own pocket, which would be unfair to the employee.
However, ‘principle’ and ‘practice’ are quite often two different things, so where does leave this us as far as travel compensation is concerned?
Company cars
Company cars are a regular feature in the packages of managers and senior executives, and companies that provide company cars have mostly sorted out the question of fairness of value in terms of ‘who gets what car’ in their company car policy.
There is an important difference between company cars and travel allowances in that the use of a company car can be legally granted to an employee solely for private travel.
If there is only private travel, structuring a company car into a package does not break the principle that the employer’s expense should not be paid for by the employee out of his package, and justifies including the company car as a package component.
However, this is not always the case – the company car often has both a private and a business value embodied in its ‘cost’ value.
From this it appears that if the employee is prepared to do the job for the package total that rewards his services, and if the employee understands that if there is a business portion of the use of the company car is coming out of his own pocket, then you have an agreement.
Travel allowance
The problem with a legitimate travel allowance is that its value will always include a business travel portion.
The business cost of the travel allowance should be marginally increased to provide an element of private use value that is essentially ‘salary’.
The business portion of the travel allowance cannot be included in the package, while the private portion can be included. If included, the private portion must have an accurate cost value otherwise it would make no sense to include it in a costing structure whose purpose it is to control the employer’s costs.
The private travel value of a travel allowance can only be calculated with accuracy at the end of the tax year, but the value is needed from the start of the tax year for the package calculation. Therefore, the estimated value of the private portion must be used, in the full knowledge that the final private travel value at the end of the tax year will differ from the estimated value.
In practical terms, this boils down to the same thinking as for the company car.
If the employee is prepared to do the job for the package that is offered as the reward, and if the employee understands that the business expense portion of the travel allowance is coming out of his own pocket, then you have an agreement.
Generally, in line with remuneration package structuring principles, as the travel allowance value increases, the cash component value gets less.
Employees will start to request a lower travel allowance value in order to get more cash, until one day somebody realises that they are not getting the full value of their claim for business travel expenses on assessment because the claim value is limited to the travel allowance value.
They will then demand a higher travel allowance value, and the employer might get into a risk position by overestimating the value of the travel allowance, and the cycle will repeat itself.
Travel reimbursement
It is crystal clear that a travel reimbursement is the employer’s expense, and therefore it cannot be used as a package component.