Basic Conditions of Employment Bill
- addressing the needs of small business
A Submission Paper produced by the Small Business Project and presented to the Parliamentary Portfolio Committee on Labour
27 October 1997
Contents 1. Introduction
2. Impact on Small Business
3. Regulation of Work Time
4. Leave Entitlements
5. Variation of Employment Standards
5.1 Extension of basic conditions of employment
5.2 Ministerial variations
6. All Employees Covered
6.1 Exclusion of certain categories of employees
7. Special Provisions for Small Business
7.1 Recognition of core rights
7.2 Qualifying enterprises
7.3 Small business regulatory review
8. Conclusion
1. Introduction The Basic Conditions of Employment Bill (the Bill) has been the subject of much public debate, while ongoing negotiations between employers, the unions and government have resulted in deadlock over a number of key issues. Evidence of the immense pressures from forces inside and outside of government to make concessions to business and labour is seen in key elements of the Bill, and the ‘lack of consensus’ reached in the NEDLAC negotiations.
The Explanatory Memorandum to the Bill explains that the Bill purports to recognise the advance of social justice and economic development. It further states that "... the Bill proposes to reform previous legislation so that legislation on basic conditions of employment is in line with the macro-economic strategy of government ...". The complexity of achieving this overall vision is succinctly reflected in the opening statements of the Green Paper, which stated that the new law should ... "... guarantee basic rights for all workers. It should contribute to fairness and equity in the workplace. But it can only do so within the context of South Africa’s social and economic development. ... the government has stressed the critical importance of job creation. Can we use the proposed law to promote employment creation? Could some rights hinder employment creation?"
The extent to which the Bill provides standards that are conducive to the achievement of these goals, and more specifically, the possible impact that the provisions have for small, medium and micro-enterprises, is the benchmark by which we measure the proposals contained in the Basic Conditions of Employment Bill. This submission firstly sketches a perspective which informs the discussion and recommendations in the ensuing sections. Following this, the impact of the Bill on small business is considered in greater depth. The last component reflects on the issues raised and offers a few special provisions for the SMME sector, to alleviate any possible negative affect on job creation and the growth of the small business sector.
The basic tenet of a regulated labour market inherent in GEAR’s proposals is evident in the contents of the Bill - that is to preserve employment standards and workers’ rights. It is here that some small business employers have admittedly been notorious for side-stepping their responsibilities. Recognising this, and the constitutional importance of securing basic employment rights for all workers, we welcome that the Bill covers all employees.
On the other hand government should understand that job creation cannot be forced or artificially achieved. It must recognise that the strengthening of minimum standards may increase the costs of employment, and may discourage job creation. The intention to raise labour standards must be balanced with the corresponding application of greater employment flexibility, support for skills development in labour intensive industries and incentives for raising productivity. Regrettably these counteractive measures have not been forthcoming.
2. Impact on Small Business The Bill must be viewed in the context of efforts to promote the small business sector, as one of the pillars in government’s thrust to move the economy on to a growth path of 6% per annum and the creation of upwards of 400 000 jobs per year. GEAR’s efforts are focused on ensuring that the small and medium enterprise sector grows as a valuable contributor to job creation, economic growth and improving the overall competitiveness of the South African economy. International experience around the world has shown that small firms have grown to account for a major portion of economic activity.
In 1987 India’s small-scale producers accounted for output of about $60 billion, exports of about $2.5 billion and employment of over 10 million people.
In Japan SMEs account for a large percentage of manufacturing output of about 51.8%, about 78.5% of retail sales and about 80.6% of industrial employment.
A study on the South African experience reveals similar statistics, estimating that:
Small enterprises contribute 29.5%, medium enterprises 15.3% and large enterprises 55.2% to total private sector employment, including state-owned enterprises.
The contribution to GDP is estimated to be 20.8% for small enterprises, 11.9% for medium enterprises and 67.3% for large enterprises.
Although large enterprises may still dominate the economy, the large-scale retrenchments and downsizing being experienced by big business emphasise the importance of the SMME sector as a pivotal agent for economic growth and job creation. This is the context in which the Bill needs to be evaluated.
On an international level, the International Labour Conference adopted a report on "General conditions to stimulate job creation in small and medium-sized enterprises" at its 85th Session in Geneva earlier this year. The ILO agreed that a Recommendation would be tabled for further discussion and adoption at its next session. Its draft Preamble recognises the delicate balance that has to be achieved. On the one hand, member States are encouraged to promote SMEs in their catalytic role with regards to "sustainable economic growth, accessing domestic and international markets, stimulating innovation, entrepreneurship, technology development and research, and increased economic participation of disadvantaged and marginalised groups in society". On the other hand member States also need to "safeguard the interests of workers in SMEs" in accordance with ILO conventions.
It is hoped that our Basic Conditions of Employment Bill also aspires to achieve that same delicate balance, without stifling the growth potential of the SMME sector and the contribution it can make to job creation, long term poverty alleviation and economic prosperity.
3. Regulation of Work Time The provisions listed below regarding the regulation and arrangement of working time represent those which will have a critical impact on small business:
Despite the limit on ordinary hours of work, an employee may be required to work up to 12 hours per day, including meal intervals, without receiving overtime pay.
The daily 3 hour limit on overtime is scrapped, but the weekly limit of 10 hours in any week still applies.
Payment for overtime is increased to time and a half.
Any individual and collective agreement to work overtime is valid for not more than one year.
Although the working week is reduced, the provisions allow more flexibility in arranging working time. There is also no daily limit on overtime, but the cost is dramatically increased. On the positive side the Bill does allow employers to exchange overtime or Sunday work for paid time-off instead of pay at overtime rates. But this may not be viable for smaller enterprises who rely extensively on a small, not easily replaceable workforce. They may not have the resources to employ more people and provide the necessary training, while still maintaining production at full-tilt. Raising the overtime rate is probably one of the greatest cost impediments facing any small business. Allowing SMMEs a phase-in period forms part of the recommendations highlighted later in the paper.
Compressed work weeks are allowed, i.e. getting employees to work longer hours every day to cover the weekly limit in fewer days without receiving overtime pay.
A collective agreement may permit averaging of normal working hours, but not over more than 4 weeks. This means that workers can work longer hours in busy periods in exchange for shorter hours during slack periods, without being paid overtime.
For a small business the cost implications mean that choices have to be made - does a small business owner work on Sundays, or does (s)he simply extend the ordinary working hours to the maximum daily limit allowed? On the other hand, the provisions allowing averaging and compressed work weeks may off-set these cost implications, especially for small firms. It is imperative that the flexible regulation of work time is not further diluted before the Bill is enacted.
Night work is allowed, but employees must be compensated at a premium and employees must be able to obtain transport to and from work.
Although the Bill proposes flexibility in the arrangement of working time, these gains are substantially reduced by the reduction in working time, the stricter regulation of work time and the increased cost. Many SMMEs rely on Sunday work, overtime and night work to operate effectively and profitably. The over regulation of the "flexible" arrangement of work time may simply force them out of business. Once again, it is imperative that SMMEs be strongly encouraged to respect basic employment standards. But all the efforts to support the growth of the small enterprise sector may come to naught with the imposition of rigid labour standards as currently proposed.
4. Leave Entitlements Despite not granting paid maternity leave, the Bill provides full job security, while employees may still claim 45% of salary from the Unemployment Insurance Fund. The Bill also provides for 3 days paid family responsibility leave and 3 weeks annual leave on full pay.
It is in the area of protection for employees before and after child birth that the Bill is an assertive and welcome improvement on the existing legislation. As highlighted below, maternity leave is one of the core rights that should not be reneged on by small business employers in particular.
Although maternity issues should be recognised, matters related to leave entitlements have a significant impact on the human resource management of any small enterprise. For example, in many small businesses long leave periods mean a reduction in the number of available work hours, disruptions in production and the costly retraining of employees. Some degree of flexibility should be allowed to small business employers. This could mean that basic leave minimum’s should be applied to all qualifying SMMEs, and additional leave benefits such as family responsibility leave should be negotiated in individual employment contracts or by collective agreement.
Section 27 restricts the application of family responsibility leave to those employees in employment for longer than four months and who work for at least four days a week. This narrow entitlement to family responsibility leave is welcomed as the costs of affording all non-standard employees these rights may prove to be an exorbitant cost, especially for small business employers. In addition, it is suggested that variation of the number of days and circumstances of granting this type of leave should be extended to include individual negotiations between employer and employee and not be confined to ‘variation by collective agreement’ only.
5. Variation of Minimum Standards The Bill provides a mechanism for the variation of employment standards. It is important for SMMEs that these provisions remain open-ended, i.e. they continue to allow upward and downward variation. Aside from the non-variable minima (section 49), other minima may be varied or excluded by bargaining council agreements, or other collective agreements, or sectoral determinations or individual employment contracts.
5.1 Extension of basic conditions of employment Despite the spin-offs for small business that such a broad scope for variation provides, there are two cautionary notes. Firstly, the broad scope of variation only applies to variations made by collective agreement in a bargaining council. Individual employers may only vary a narrow scope of provisions by agreement with their employees, "to the extent permitted by this Act or a sectoral determination". Small businesses would have to join bargaining councils or accept the extension of bargaining council agreements to benefit from the more expansive variation of minimum standards allowed by section 49(1). As discussed below, the lack of flexibility to vary basic conditions of employment may be detrimental for the SMME sector.
Secondly, in further cementing the importance of collective bargaining, the Bill provides in section 49(4)(b) that the variation or exclusion of employment standards by a bargaining council agreement effectively trumps all other types of variations or exclusions.
Aside from this, a possible consequence could be the variation of employment standards by a bargaining council which is then extended to the whole industrial sector under section 32 of the Labour Relations Act. This amounts to a unilateral override on the rights of those not party to the agreement. One accepts that non-party employers could win or lose depending on whether such an extension provides for upwards or downwards variation to basic conditions of employment.
Even so, the imposition of unaffordable hardship on SMMEs could jeopardise efforts to grow the sector and be contrary to the constitutional rights of individual employers to engage in collective bargaining. Even GEAR recognises that industrial agreements should be sufficiently flexible to avoid job losses. It echoes the persistent and long-standing call of many small business organisations that the Minister’s discretion to extend bargaining council agreements to non-parties should be broadened to take into account:
the ability of employers to carry on their business successfully;
the operation of small, medium or micro-enterprises, and new enterprises;
wage differentials and inequality; and
the likely impact of any proposed condition of employment on current employment or the creation of employment.
Aside from extending the Minister’s discretion under the Act, a sympathetic hearing for SMMEs was recently echoed by the Minister of Labour himself. He has indicated that the Ministry was looking at changes to the LRA that would make bargaining councils more forthcoming with exemptions. This would be achieved by amending the Act to allow partial exemptions. This turn of events follows a series of recommendations by the Labour Market Commission and should be extended to the arena of basic conditions of employment. It is hoped that these amendments materialise, and don’t amount to empty political gesturing.
5.2 Ministerial variations Administrative exclusions or variations are available upon application to the Minister by any employer or any registered employers organisation. The factors highlighted above should constitute part of the guidelines prepared by the Employment Conditions Commission to assist the Minister in assessing applications for variation.
The Minister is quoted as wanting to encourage exemptions. For this to become a reality it is necessary that exemption procedures be simple, speedy and provide effective relief. Otherwise small enterprises will simply avoid the industrial relations system altogether. We agree with a structured approach in which enterprises applying for variation should have to motivate why the variation should be granted. A simple, easy-to-read two page application form may suffice. The Department, together with small business chambers, are strongly encouraged to jointly take on the task of increasing the awareness of the Ministerial variation procedure among small firms. Labour inspectors should also be required to inform employers of the variation procedures.
And finally, encouraging labour market flexibility for SMMEs means that the Ministry must actively address the current provisions in the LRA, as they are devoid of practical application. For example, the LRA requires bargaining councils to provide for the representation and participation of small and medium-scale enterprises. This section needs further clarification and elaboration to provide statutory guidelines as to how this should be done. Bargaining councils are also required to establish independent exemption bodies to deal with applications for exemption. But there is no clarity over the composition, structure and modus operandi of such bodies.
6. All Employees Covered The current labour market has many forms of employment relationships that differ from full-time employment. These were previously excluded from the scope of the existing Act, whereas the new Bill covers all workers. Although anticipated, this broadened scope is considered to have a substantial impact on labour costs in both the private and public sectors.
Some have expressed the view that it is because of this that some of the watershed provisions of the Green Paper have been toned down. The Bill has had to take into account the consequences of a sharply increased public sector wage bill on the fiscal austerity measures prescribed by the GEAR strategy. Illustrative of these pressures is the downward reduction in pay from double time to time-and-a-half in the case of regular Sunday workers, of whom nurses and police officers constitute a large proportion. Stark economic realities such as these place some of the broad-sweeping proposals contained in the Bill into a very clear perspective.
Serious consideration must be given to the burdens imposed by fanciful concepts such as the commitment to a 40 hour week contained in Schedule 1, and comprehensive guarantees of minimum standards to all employees.
It is agreed by most commentators that the Bill should provide a floor of basic rights for all workers. The ambitious plans of the Department of Labour to establish minimum labour standards that give effect to the requirements set out in the Constitution and the country’s public international law obligations are commendable. But whilst not seeking to derogate from the reasonable obligations that should be imposed on all employers, big and small, the plight of small, medium and micro-enterprises across the continuum of business activity must be acknowledged and adequately reflected in the Bill.
6.1 Exclusion of certain categories of employees The Bill provides that certain provisions do not apply to employees who work less than twenty four hours per month. This means, for example, that a part-timer working two five hour shifts per week in every month as a waiter/waitress in a restaurant (i.e. a total of 40 hours) would qualify for:
overtime at time-and-a-half;
double pay, or time-and-a-half, for Sunday work and paid public holidays;
premium payment for night work, and must be able to obtain transport; and
daily and weekly rest periods.
The cost to employers of providing this level of minimum benefits to non-standard employees could very easily exceed the contribution they make to revenue, productivity and profitability.
The Bill also stipulates that the requirements on leave and particulars of employment and remuneration respectively do not apply to those employees working less than twenty four hours per month. This means that the same waiter/waitress would also be entitled to:
three weeks paid leave;
paid sick leave;
maternity leave and protected employment before and after child birth; and
possibly even family responsibility leave.
Although this exclusion is welcomed in recognition of the need for flexible labour standards, the qualification threshold of less than twenty four hours per month does not reflect the realities of the labour market. Although the threshold is higher than provided in previous drafts, the exclusion remains so low that it may be of ‘little’ consequence to most employers, since very few employees would qualify.
Small business employers, especially emerging enterprises, rely extensively on temporary workers and part-timers to operate competitively and profitably. Hence it is strongly advocated that the exclusion threshold be raised substantially. It is recommended that the Bill specify the types of non-standard employee excluded from specific provisions, not all, by setting the working time threshold for the exclusion clause at less than 16 hours per week.
7. Special Provisions for Small Business Most notably, the granting of carte blanche exemption to certain types of enterprise is not what is being suggested. Our recommendations focus on addressing the problems experienced by SMMEs and how best to harness the dualism of the labour market within a structured legislative framework. These proposals expand on sentiments expressed by the Labour Market Commission, that special provision should be made for small enterprises, while covering all employers and employees under the same law.
7.1 Recognition of core rights As a matter of principle the wholesale abuse and lack of compliance with the current statutory framework by certain smaller enterprises is not condoned. Stakeholders within the sector are strongly urged to adopt this standpoint as the hallmark by which to advocate for alternative relief for the sector. Business chambers should obtain a mandated commitment from their members that compliance with a required core basket of rights is a sine qua non for obtaining any relief.
Collateral to this approach is the identification of broad categories of non-variable minima and variable minima. The Bill identifies the non-variable minima as:
the regulation of working time, except to the extent permitted by the Bill;
the health and safety provisions in respect of night work;
the provisions on child labour, forced labour and maternity leave;
the provisions on leave and sick leave, except to the extent permitted by the Bill.
Many of these provisions are high cost items for small enterprises. Hence, to enable small firms to comply with the new law, it is recommended that the Bill’s provisions be "phased-in" over a period of time. In other words, small enterprises should be allowed a grace period of one year in which to implement all the basic minima. This does not mean that basic conditions of employment do not apply to SMMEs. Rather, the current Act continues to apply during this period. Concurrently effort should be invested in educating small business employers about their obligations under the new dispensation.
Equally important is the "flexible" enforcement of the Bill. Re-engineering the approach and attitude of the labour inspectorate towards informing employers of their duties and ensuring positive enforcement of the Bill’s provisions by securing written commitments from small business employers is necessary to induce a culture of respect for the rule of law.
Aside from phasing-in the Bill, synergies between industrial and labour market policy should look at drawing small businesses into the mainstream of production within industrial clusters by extending training facilities to these enterprises, creating easier access for SMMEs to new and skill-enhancing technologies and addressing the real problems that SMMEs have in complying with the law. Legislation alone cannot achieve this. It requires a concerted effort from employers, government and the labour movement.
7.2 Qualifying enterprises International experience from many of the "Tiger economies" of the East and even some of the more industrialised countries show that, while it is necessary to focus programmes to uplift the poorest members of our society, it is the more formal small to medium-sized enterprises which add value to economic growth and job creation. If government is serious about creating jobs and economic growth through SMMEs, then the recommendations listed above need to apply to those enterprises that will do this.
Hence it is essential that more liberal thresholds be set when granting relief to SMMEs. A cursory scan around the world illustrates that in Japan and Kenya a small enterprise is defined as employing less than 50 employees, in Korea less than 20, in Italy less than 50 and more than 20, and in Poland less than 10 employees.
In South Africa there are similarly as many interpretations, with the median number of employees around 20 employees for small or micro enterprises. An economic model should be developed to determine the optimum number of employees. As a start it is proposed that the Bill identify 20 employees as the qualification threshold. By adopting this approach emerging enterprises (say less than three years old) and those below a certain size (employing less than 20 employees) could be eligible for the relief measures identified above.
A clause specifically mentioning small enterprises as a ground for partial exemption should then be introduced into the Bill, accompanied by a schedule identifying the categories of enterprise which qualify for the exemption.
7.3 Small business regulatory review The Minister recently announced an investigation into the appropriateness of the provisions of the Bill for small business before the Bill is promulgated. This is being done in conjunction with the National Small Business Regulatory Review being initiated by the Department of Trade and Industry.
This impact analysis is a welcome and positive development that is hopefully seen as a part of the regulatory framework introduced by section 18 of the National Small Business Act, which requires government departments to assess the impact of proposed and existing laws on small business. Listed below are a number of recommendations that should be included in the terms of reference for this investigation:
An economic model determining the optimum number of employees in any small enterprise should be developed to guide the investigation in identifying those enterprises eligible for relief.
It may be useful to include a correlation model tracking the differential impact that the Bill may have on differing sizes of enterprises, i.e. small, medium and micro.
An assessment should be made of the costs imposed on SMMEs by extending basic employment rights to non-standard employees, so that a realistic threshold can be established for the exclusion provisions.
What remains unclear at this stage is what happens to the findings and recommendations arising from the DTI’s investigation. It is strongly advocated that the following options be explored
amending the Act to make statutory concessions to small business;
incorporating the findings in the guidelines prepared by the Employment Conditions Commission for the Ministerial variation procedures;
incorporating the findings when the Commission advises the Minister on the publication of a sectoral determination; and
utilising the findings in developing positive enforcement procedures for the labour inspectorate.
8. Conclusion Due consideration of the different circumstances and needs of small business is necessary before the Basic Conditions of Employment Bill is passed in Parliament. For many small business entrepreneurs the actual cost impediments imposed by many of the Bill’s proposals will make small enterprises uncompetitive and possibly force many to either close down or avoid the law. This is highly undesirable, as SMMEs must be seen to be an essential component of the mainstream economy and a responsible participant in the labour market. It is hoped that this brief submission will serve to inform and guide the deliberations of the Labour Portfolio Committee and all Honourable Members of Parliament in the debate over a new employment standards dispensation for the country. That consideration is provided for the small, medium and micro-enterprise sector in this Bill is vital, not only for the SMME sector alone, but for the growth and prosperity of our whole economy.