Has the South African government finally acknowledged the need to treat small businesses differently from larger ones when it comes to the country's rigorous labour laws?
Amendments to the country's Labour Relations Act, which come into effect next month and which exempt many small firms from new rules on hiring contract employees suggest that the government may be slowly coming around to the idea that small businesses need to be treated differently.
Employers with under 10 employees as well as those with fewer than 50 employees that have been operating for less than two years have been exempted from new provisions in the act which make it obligatory for employers to convert temporary employees into permanent workers after three consecutive months of service.
The amendments were signed into law by the country's president Jacob Zuma on August 18.
Even though those who own more than one business will not benefit from the exemption, the reprieve for small firms is significant. It was not contained in the original draft of the amendments which first surfaced in 2010 and which had been much criticised by businesses, while a regulatory impact assessment (RIA) projected the provisions would lead to massive job losses.
In 2002 amendments small firms with fewer than 10 employees were exempted from a number of minor areas in the Labour Relations Act (such as scrapping the daily work overtime limit of three hours and allowing conciliation to be followed immediately by arbitration to expedite matters at the CCMA, the country's dispute resolution body).
The new exemptions however signal a change on how the state views small businesses - no longer seen as just street traders or spaza shops (tiny often unregistered grocery stores) but as enterprises with up to 50 employees. This is significant as it's those small firms with over 10 employees that are more likely to create the jobs the country needs. A helping hand to them is much needed.
In addition the annual turnover threshold for white-owned firms past which one will need to have a Black Economic Empowerment (BEE) certificate will double from the present threshold of R5-million a year to R10-million when the new BEE codes of good practice come into effect in May next year. This is evidence that the government may finally be conceding that effects of red tape and legislation on small businesses.
But despite the small concessions by the labour department's labour policy and industrial relations head Thembinkosi Mkalipi (pictured left) and his team, it's not nearly enough.
South Africa isn't stifled by bureaucracy and red tape as much as its fellow Brics countries are (particularly India and Brazil) but its strenuous hiring and firing procedures and its bargaining council system mean it has the worst labour laws among Brics members.
It's why the amendments contained in the Labour Relations Act on bargaining councils are little more than laughable.
Bargaining councils essentially hold small businesses back because they mandate small and large businesses to pay the same wages and benefits. Wage agreements are negotiated between trade unions and large firms who then extend the agreement to non-party firms - most of them small businesses. Like this it is difficult for smaller firms to compete.
And while small firms can apply for exemptions from bargaining councils, many argue that those who decide on whether to grant firms extensions or not are often those same firms very rivals.
In a bid to close this gap, amendments to the act mandate that the exemptions appeal body must be independent from trade union and employer parties to the council. The labour minister will also have to consult with the public when considering whether to extend an agreement where parties are only sufficiently representative.
The latter measure may be a step forward, but trade unions, working together with bargaining councils, have been known in the past to go on massive drives to sign up as many workers as possible just before an agreement is set to lapse.
Agreements are then signed for lengthy periods, effectively forcing non-party members to abide by the agreement - in direct contract to the constitution's clause on freedom of association.
The minister may also request a certificate from a council specifying the level of representativeness of a bargaining council and this may be taken into account for any purpose under the act, including a decision by the labour minister whether or not to extend a collective bargaining agreement or not.
But previous minister have been known to extend agreements even when they fell short of the targeted 50% representivity of an industry, simply because the minister is not under any obligation not to extend an agreement if the target is not reached.
On the surface the amendments appear to address a key argument in the court bid brought against the labour minister last year by policy organisation the Free Market Foundation - namely to allow the minister some discretion to consider the impact on small businesses before opting to extend an agreement or not.
If you only can do two things
If the government really wants to help small businesses it should focus on doing just two things - fix the terrible education system and hiring professional accountable people to work in the public sector. Those working with businesses should preferably have some business experience.
A better educated population will make for better entrepreneurs that don't fail so easily as they do now. It will also help create a more capable public sector, which will be better able to implement key reforms and then carry then out in the most efficient way backed by modern technologies.
Perhaps the labour law concessions are evidence minister of small business development Lindiwe Zulu has honoured an earlier promise she made to host discussions between small businesses and the unions on labour legislation. But it will take more than to boost small businesses - the very foundations are unstable.
Education is the only answer.
For more on the new Labour Relations Act's impact on small firms see Small Business Connect's article.
When it comes to labour laws the South African government is in denial. Even its president, Jacob Zuma, seems to live in cloud cuckoo land.
In September last year he told members of the country's upper house, the National Council of Provinces, that critics of South Africa’s labour laws fail to compare the country’s laws to those of similar countries or to consider the country’s history during apartheid when black workers had few rights.
Zuma, known for his scanty reading habits, perhaps never glanced at last year's Global Competitiveness Report 2013-14. The report, by the World Economic Forum (WEF), ranks South Africa second last out of 148 countries on hiring and firing practices (only Venezuela fares worse) and 144 for flexibility of wage determination. It also ranks South Africa last for co-operation on labour-employee relations. This year's report, due out in the next few weeks is unlikely to reveal any progress in these areas.
South Africa's Brics partners are all ranked far higher on these measures (see the graph below). Only Brazil comes close to the level of labour legislation that South Africa has.
Earlier this month, Lindiwe Zulu chosen by Zuma as South Africa's first small business development minister, was already busy shaking things up. In her inaugural budget speech she hinted at her intention to review legislation that make it difficult for small businesses to survive and said her department would over coming months look at present labour regulations to see how they can be improved.
She may need to act fast, particularly with MPs' plan to amend a number of the country’s labour laws, which will among other things force all employers to provide reasons for hiring any one on a contract for more than six months. The amendments have been stuck in Parliament for a number of years.
South African business owners have long complained that the country has some of the toughest labour laws in the world (contained in its Labour Relations Act. Historically bad relations between employers and employees worsen things.
Central among the complaints is that the country has difficult firing procedures and a central bargaining system that crushes small firms.
The first stems from the fact that employers can be dragged to the country's labour mediation body - the Commission for Conciliation, Mediation and Arbitration (CCMA) - for merely neglecting to follow the correct procedure when firing an non-performing worker.
Added to this the country’s high unemployment rate drives many desperate employees who have been fired, often legitimately, to lodge cases with the commission in the hope of extracting severance pay. Small business owners often simply pay up rather than spend weeks tied up in labour cases – which only makes many an employer think twice before hiring anybody.
Bargaining council agreements are the second central complaint. These agreements apply to a number of mainly industrial sectors (covering a third of all workers). They mandate that all firms, no matter their size, pay employees the same wages and benefits. The terms of agreements, including benefits and wages, are negotiated by trade unions and big firms in each particular industry and then extended to small employers.
Many small businesses cry foul and say that extending the agreements without them having had a hand in negotiating them is unfair and goes against one of the country’s constitution’s basic principles: that of freedom of association. The bargaining council system allows for an exemptions procedure, but many point out that it doesn't work. Like this court challenges have been plenty in recent years.
Politicians' cries that South Africa isn't so bad when compared to its peers may only show just how out of touch they are. Some may point out that compared to Brazil South African labour law isn't too bad.
But Brazil is hardly an example for others to follow. Mandatory requirements in its labour laws (including employers having to pay a 13th salary, cover lunch and transports costs and contribute to various taxes and pension costs) increase payroll costs by 70% to 80% on average, according to accounting firm Deloitte, and drive many employers to take on freelancers instead, while spending endless hours on labour issues.
Even in India labour laws have recently been criticised*. There the main problem is the country's large number of labour laws (44 central laws), which leads to inspection visits by different officials under different laws and promotes corruption. In July small firms joined a chorus of others calling for labour reforms. South Africans should be shouting too.
Time for some more
In South Africa in 2002 a number of small amendments to the labour laws came into effect, following a 1999 review. These among others included scrapping the daily work overtime limit of three hours and allowing conciliation to be followed immediately by arbitration in order to expedite matters at the CCMA .
While it's not clear how good the amendments have been in assisting small firms, the latter measure hasn't done much good. The commission's annual report last year pointed out that years on few employers and employees still opt for the expedited process.
It's time to do more. The news this week that the country's unemployment rate has hit the highest in six years is nothing to be taken lightly. Bold steps are required. Making it easier to fire employees and ending obligatory membership by small businesses to bargaining councils may help small businesses to hire more employees. It could do something to tackle the country's terrible joblessness.
*On July 30 India's cabinet approved proposals to amend three labour laws. Some of the proposals will do away with the prosecution of petty offences, for example the failure to provide a clean toilet, others simplify procedures for small firms.
In radio and television interviews she comes across as eager and willing. But South Africa's new small business development minister Lindiwe Zulu, who was sworn in last week, may have underestimated just how hard her task ahead will be.
Despite the criticisms of many, like myself – who have pointed out the weaknesses of having a new ministry (see my previous blog article) – President Jacob Zuma elected to put in place the new ministry and Zulu was sworn in by Zuma last week in Pretoria (see below photo).
Yet Zuma's former advisor of international relations has little if no experience in business, let alone small business. This is worrying, as it might open her ministry up to being hijacked by lobby groups - such as the Black Business Council, which had long been calling for the new ministry.
But she remains resolute. Last week she told BusinessTech: “I don’t think this ministry would have been set up to failure. I have no space for failure. I am sure I will be able to fight for this at every level.”
She also told the business website that consultation and implementation will be her key areas of focus as she starts from scratch and that she would also be “looking at what other countries have done" (this last statement is an oft heard refrain in South Africa from those at the top).
In a recent interview she revealed that her ministry would at some time host discussions between small businesses and the unions on labour legislation. But she has cautioned against the workers’ rights being eroded. Again, an often-heard refrain from South Africa's ministers.
In the whole she seems to talk a lot about the informal sector, but next to nothing about the real job-creating firms - start-ups with innovative ideas. Her constituency rather, seems to be the thousands of struggling traders, rather than those - black or white - with the potential to create thousands of jobs. Both types of businesses have a role to play. Zulu must speak to both.
What must the minister do?
So what should Zulu do to help improve the government's small business support? Here are three main areas that the minister should focus on:
1-Improve co-ordination and monitoring
· Set up a more effective small business council (not the old National Small Business Advisory Council) where heads from the private sector and public agencies are represented and transparency is assured by publishing the minutes of meetings. This will provide a better voice for small businesses (Read my recent article detailing Malaysia's small business council).
· Set up a regular small business census to track in detail how the sector is performing. It's time South Africa had some real statistics on the sector, like India, Brazil and Malaysia do.
· Simplify the complicated definitions for small businesses that appear in the present National Small Business Amendment Act. If emerging peers like Chile and Malaysia can do it, so can we.
2-Partner with the private sector to deliver quality programmes to small businesses.
· Review the current incentives that the state offers small firms and look at more ways to partner with banks and large companies. The new Black Economic Empowerment (BEE) codes (set to come into force next year) and the Financial Sector Charter both offer an ideal way to do this. High-growth firms should have different programmes from micro firms (Read this article I wrote about the Financial Sector Charter).
· Build up the capacity of the Small Enterprise Development Agency (Seda) such that it can support both high-growth and informal traders. You can't have unemployed youths helping entrepreneurs - even if they happen to be informal-sector traders.
3-Look at more ways to reduce red tape, simplify procedures
· Consider blanket exemptions for small businesses from bargaining councils. In those sectors that have bargaining councils (they currently cover about a third of workers) small firms are expected to pay the same wages and perks as large firms. This is unfair. The current exemption system does little to remedy this as the exemptions are either for very micro firms (less than five workers) or run for often no more than a year.
· Push the National Treasury to move to procuring goods online (e-procurement) which will help reduce costs and bring more small firms into public procurement. It's a better way than putting in place set-asides which run the risk of creating serious distortions in the marketplace (Read this article I wrote in 2012 on e-procurement lessons from Chile).
· Work with the Companies and Intellectual Property Commission (CIPC) and the South African Revenue Service (Sars) which are both in process of reducing the company and tax registration burden.
· Publicise the use of regulatory impact assessments (RIAs) among government departments when new legislation is considered. RIAs are useful mechanisms in ensuring that any new legislation doesn't end up killing small businesses, but far too few government departments make use of them.
Stephen Timm writes on small business. He has written about policies and programmes in a number of emerging countries, including Brazil, India, Chile, Malaysia and South Africa. He currently resides in Sao Paulo, Brazil. Click here to read or download his reports.
HIRING staff looks set to become a massive exercise bound in red tape if the Department of Labour gets it way with its proposed labour law amendments, say labour law consultants.
And as the date for final submission of public comments set for Thursday nears, labour law advisors, employers and business associations are preparing to flood the department with submissions opposing the planned laws.
The proposals include banning labour brokers, converting all temporary employees into permanent employees barring employers being able to prove why they should be on a contract and fining employers who don’t report vacancies in their business to the department.
A regulatory impact assessment (Ria) report by local policy analysts concluded that if the proposals were passed in their present form they would result in firms steering away from hiring more employees, putting thousands of jobs at risk.
Michael Bagraim of Bagraims Attorneys, one of a number of labour law consultants who has filed a submission to the department, said the proposals were “detrimental” to job creation and that they went against the government’s promises to create more work.
One of the proposals is for an Employment Services Portal, contained in the Employment Services Bill, from which businesses will also be able to access potential employees through an internet database.
The bill will effectively boost the department’s existing employment services database by making it mandatory for employers to report any vacancies to the department within 14 days or face fines of up to R10 000.
Though the Ria report said the bill “imposes a significant administrative burden on employers”, the department believes the portal will do away with high fees charged by labour brokers and lessen the “costs of doing business”, as the system would be free to use by employers.
The department’s head of employment services and work sector placement and registration, Zodwa Mabaso, said that before drafting the bill the department had studied 29 countries.
Many businesses including smaller firms in those countries the department visited, believed the system played a valuable role in reducing recruitment costs, she said.
However Mabaso admitted that a Swedish colleague had advised her department against fining employers that neglected to report vacancies, pointing out that Swedish courts were clogged up with cases taken up by employers seeking to challenge the fines.
Shaun Snyman, a director of labour law advisors Labournet, questioned how an employer would be able to determine exactly when a vacancy came about and when they would have to report it, adding that the idea to report vacancies was a “big fat waste of time and resources”.
“You cannot compel a process of recruitment through that process. The whole thing just creates distrust,” he said, adding that the department under-estimated the complex nature of recruitment.
“If a Department of Labour CV landed on their desk they would say ‘oh not another one’ and then they are going to toss it into the dustbin,” he said.
He believed that the department should rather look to improve the management of its existing employment services database and pointed out that if it was well managed and remained free of charge many employers would opt to make use of it rather than spend thousands of rands using recruitment agencies.
Snyman also pointed out that the clauses contained in the Labour Relations Amendment Bill that propose that all work be fulltime unless employers can prove otherwise, would only lead to unemployment.
Employers looking for someone to stand in for an employee on sick leave or maternity leave would think twice about hiring someone if there was a chance that when the other employee returned, that the new employee would demand that their job was permanent – especially if it meant having to go to the CCMA or Labour Court to argue their case.
Added to this Snyman said the proposal to make it mandatory that all CCMA cases be held as joint conciliation and arbitration (or con-arb) sessions, rather than separate ones, would see systems at the CCMA collapse.
He believed not having a separate initial conciliation step would encourage employers to steer away from settling early and to rather fight for all they are worth, forcing cases to drag on for longer.
This article originally appeared in Business Day on 15 February 2011.
Stephen Timm is a