If a public official voluntarily resigns from employment, the payment to him or her of a “golden handshake” would not be consistent with the duty of his or her employer in terms of section 51 of the Public Finance Management Act “to act with fidelity, honesty, integrity and in the best interests of the public entity in managing the financial affairs of the public entity” because the best interests of the entity — the fulfilment of its goals — would not be served by the payment.

Instead, the payment would amount to “irregular expenditure”, as defined in the act — that is, “expenditure, other than unauthorised expenditure, incurred in contravention of, or that is not in accordance with, a requirement of any applicable legislation [including the act]”, or “fruitless and wasteful expenditure”, defined as “expenditure which was made in vain and would have been avoided had reasonable care been exercised” — and accordingly be unlawful.

Molefe’s R30m more illegal golden handshake than pension payout: Rosemary Hunter and Ludwig Frahm-Arp of attorneys Fasken Martineau; first published on 19 May 2017 in BusinessLive published by Business Day [subscription required]

Further excerpts

When Brian Molefe announced in November 2016 he was leaving Eskom after serving only 22 months of his five-year contract, he said he was doing so “voluntarily” because it was “in the interests of the company and the public that it serves”.

According to news reports at the time, the board announced it “regretted” but “understood” Molefe’s decision, and Public Enterprises Minister Lynne Brown issued a statement saying she regretted his resignation.

Neither Molefe nor the Eskom board revealed at the time that Eskom had agreed to pay R30m — the equivalent of the remuneration he would have earned during the balance of his contract if he hadn’t left prematurely — to the Eskom Pension and Provident Fund to be used to provide Molefe with an unusually generous pension benefit.

When that information came to light a few weeks ago, the minister reportedly told Eskom’s board she found its explanation – that it thought the “pension arrangement” an appropriate reward for good performance — “lacking in legal rationale”, particularly as he had already received a generous performance bonus.  The board then tried to persuade Molefe to relinquish his claim to the “pension arrangement”, and when he refused, it reportedly “rescinded” its “approval” of what it then said had been a request by him for “early retirement”.

. . . . .

In the meantime, the pension fund had reportedly used the R30m to provide the generous benefit to Molefe — not in terms of its rules applicable to benefits payable on early retirement, for which he was not eligible as he was only almost 50 years old, but in terms of its rules applicable to benefits payable on the termination of employment on the grounds of “retrenchment”.

But such a benefit is only payable in terms of its rules on the termination of employment due to “a reduction in or reorganisation of staff, or to the abolition of his office or post, or in order to facilitate improvements in efficiency or organisation or to retrenchment generally”.  None of these circumstances was applicable to Molefe’s departure from Eskom.

There are limited circumstances in which a payment to a departing employee of the state or public entity of more than the remuneration earned by the employee’s past service may be justified and is, thus, lawful.  It all depends on whether the reasons given for it were justified by the circumstances in which the decision was made.

Unfortunately for Eskom, several inconsistent reasons have been given for Molefe’s departure at the end of 2016 (resignation, early retirement and now, it seems, redundancy) and his subsequent reinstatement (his threat of litigation against Eskom and his value to it).

The only reported reason given for the special payment to the pension fund was that it was regarded as a reward for good performance.  Even if one of the various reasons given for Molefe’s departure, the special payment to the fund and his reinstatement was a good one, that would not make the reinstatement decision rational and lawful.

. . . . .

If the official had been fairly dismissed for misconduct or poor performance amounting to a breach of contract, the employer would not have had to compensate the employee for the loss of his or her future employment income, either in the form of severance pay or otherwise, whether the employee was employed in terms of a contract of unlimited duration or a fixed-term contract.

If a public official had been fairly dismissed on operational grounds — that is, to reduce the employer’s employment costs, improve operational efficiencies and the like — then:

  • If the public official had been employed on the basis of a contract of unlimited duration, he or she would have been entitled to severance pay of an amount not less than the equivalent of one week’s pay for every year worked to date;
  • If, on the other hand, the public official had been employed in terms of a fixed-term contract, and provided the fixed term-term contract had no termination on notice clause, he or she would have been entitled to be compensated for the loss of the remuneration and benefits he or she would have earned during the balance of the agreed employment period unless the contract provided otherwise.

. . . . .

Assuming his fixed-term contract did not incorporate a provision permitting either party to terminate the contract on notice before the expiry of the fixed term, the payment of those amounts would not have amounted to the payment of a “golden handshake”.  It would simply be compliance with the employer’s obligations in terms of the employment contract it had made with him when his employment commenced.

. . . . .

We do not know whether Molefe’s contract included a termination-on-notice clause.  If it did, there would be no good reason to pay Molefe for the remainder of the contract.  If it didn’t, then if Eskom had decided nonetheless to release Molefe from his obligation to serve it for the balance of his contract, it would have been wholly irrational for it to retain its own obligation to remunerate Molefe for the remainder of his contract.

So, the payment of the reported R30m to the fund for Molefe’s benefit probably amounted to the unjustified and thus unlawful payment of a “golden handshake” – the kind of payment that has come to infuriate everyone concerned about the imprudent use of national resources.

If so, and if he were aware of its illegality, Molefe’s reported threat of litigation to enforce Eskom’s agreement to pay it would have been extortionate — and the decision by the Eskom board, with the apparent consent of the minister, to reinstate him in office to avoid such litigation, when they could and should have resisted it, would have been irrational and in breach of their duties in terms of the Public Finance Management Act.