Regulatory Impact Assessment of Selected Provisions of the: Labour Relations Amendment Bill, 2010 Basic Conditions of Employment Amendment Bill, 2010 Employment Equity Amendment Bill, 2010 Employment Services Bill, 2010

PREPARED FOR THE DEPARTMENT OF LABOUR AND THE PRESIDENCY BY PROFESSOR PAUL BENJAMIN, UNIVERSITY OF CAPE TOWN, PROFESSOR HAROON BHORAT AND CARLENE VAN DER WESTHUIZEN, DEVELOPMENT POLICY RESEARCH UNIT, UNIVERSITY OF CAPE TOWN

9 September 2010

Executive Summary

Chapter One deals with proposed amendments to deal with the increased number of atypical (or non standard) workers and their vulnerability and insecurity. This priority was identified in research commissioned by the Department of Labour in 2002 and submitted to NEDLAC in 2004 but has not yet produced legislative reform. The pressing need to address these issues is reflected in the ANC's 2009 Election Manifesto, which makes a commitment to regulate abuses associated with contract work, sub-contracting, out-sourcing and labour broking. Certain of the provisions in the Bill that seek to give effect to the Manifesto can either not be implemented or have significant unintended consequences.

The underlying policy objective is the need to regulate non-standard work in a way that recognises its legitimate role in a modern economy but seeks to prevent it being used as a vehicle for exploitation. Non-standard work may involve "direct" employees (part-time and fixed-term workers) and those where more than one employer/client is involved (labour broking, out-sourcing, sub-contracting). The key factors contributing to the vulnerability of many atypical employees include employer restructuring, strategies to disguise employment, gaps and loopholes in the law, and poor enforcement.

Discrimination

Mechanisms for ensuring that these workers are not subject to unfair and discriminatory working conditions are examined. These seek to balance the need for protection, on the one hand, with the employer's discretion to take into account factors such as experience and skills in determining wages and other conditions of employment.

Fixed-term Contracts

The proposal to create a presumption of indefinite employment is explored. While this seeks to deal with the abuse of fixed-term contracts, it has been viewed as restricting the legitimate role of fixed- term contract for workers employed on time-bound projects or until a specified event occurs. It is pointed out that legislation can:

· identify the accepted categories in which fixed-term contracts are justified,

· limit the contracting period in other circumstances; and

• regulate abuses associated with the rehiring of employees on successive contracts rather than employing them indefinitely.

Many countries use a combination of these approaches so as to allow fixed-term contracts to play their legitimate economic role while preventing abuse.

According the 2007 September Labour Force Survey, approximately 2.13 million workers or 16 percent of the total workforce were classified as fixed-term, temporary or seasonal workers. These workers will potentially be affected by the proposed amendment declaring temporary employment to be permanent. If the proposed amendment is implemented, a share of these more than two million workers will have to be employed permanently if the employer cannot show justification for continued temporary employment.

Employers will incur time and financial costs associated with converting temporary/fixed-term contracts to permanent employment contracts (including extending benefits such as membership of a medical-aid and pension fund). This suggests an increase in the cost of doing business for employers and the higher this share is in relative and absolute terms, the greater the impact of this proposed amendment on the cost of doing business in the domestic economy.

While permanent employment is expected to increase as a result of the amendment, it is likely that a proportion of contract workers will not be offered permanent positions, with a resulting decline in total employment (and therefore an increase in unemployment).

The amendment will benefit the proportion of the more than 2 million temporary workers who will become permanent employees as a result of the amendment. This means that those workers will not only be afforded protection against unfair dismissal, but they will also gain employment security and possibly access to benefits such as medical-aid and pension fund. In addition, the amendment will prevent employers from indefinitely employing vulnerable workers on less favourable terms utilising temporary or fixed-term contracts.

Estimates from the 2007 suggest that almost 500 000 or a quarter of all temporary/fixed-term employees have been working for the same employer for more than three years. Furthermore, more than 300 000 employees have been working for the same employer for more than five years. While the estimates presented here should be treated with great caution due to the lack of supplementary information, they do suggest that a significant number of workers appear to have been employed for more than three or even more than five years by the same employer in a non-permanent position. The proposed amendment should improve job security for these workers.

Outsourcing and Sub-Contracting

The Bill's proposal for co-responsibility between parties to out-sourcing and sub-contracting arrangements would have the anomalous consequences of creating co-liability between parties involved in legitimate commercial transactions. It is suggested that labour legislation should confine itself to ensuring that these arrangements are not used to avoid labour law obligations or to disguise employment relationships. Different approaches including a "joint employer" approach where more than one parities exercise control over working conditions are explored.

Labour Broking

The proposals dealing with labour broking that are analysed are the proposed repeal of section 198 of the LRA which has regulated labour brokers (Temporary Employment Services) since 1983; changes to the definition of an "employee" and a new definition of an employer; as well as provisions in the Employment Services Bill dealing with Private Employment Agencies. These proposals would effectively prohibit labour broking. A prominent risk is that this would violate the Constitution on two primary grounds.

The first is that it would violate the protected right to choose a trade, occupation or profession freely. It is noted that a similar prohibition in Namibia was struck down on this basis. The second such risk is that the definitional changes would significantly narrow the scope of who qualifies to be an employee under labour law.

This would not only violate the right to fair labour practices and place South Africa in breach of international obligations but also have serious destabilising effects in the labour market. This proposal was opposed in the consultation process by the representatives of both labour and business.

Drawing on international standards and comparative experience, options for regulating Temporary Employment Services are identified and analysed. Key issues that would need to be addressed include:

· the registration and control of agencies who place employees to work for "Other" either through the Department of Labour or though a statutory co-governance agency with stakeholder participation;

· identifying the categories of employees who can be employed by Temporary Employment Services by factors such as time, category of work; sector or earnings level;

· extending core labour rights including the exercise of organisational rights;

participation in collective bargaining; non-discrimination and security of employment in an appropriate and effective manner to these placed employees.

It is pointed out that researchers have recommended that labour market intermediaries who actively facilitate the placement of young and other vulnerable workers should be promoted.

In Annexure One of the report four negative consequences or costs as a result of the repeal of section 198 of the LRA are highlighted.

Firstly, depending on the extent of the demand for their labour, some of the workers currently employed by TES might lose their jobs if clients (employers) are unwilling to incur the administrative and other costs associated with directly employing these workers.

While it is difficult to accurately quantify the Labour Broking Sector using official labour force data, a significant share of these workers are recorded in the official surveys in the sub-sector "Not Elsewhere Classified" within the Financial and Business Services Sector. In 2007, more than 600 000 workers were employed in this sub-sector, with the majority of them semi- or unskilled. While this number included workers not employed by labour brokers, it should also be highlighted that not all workers employed by labour brokers were recorded in this sub-sector, as this sector of employment is self-reported and individuals may report the sector applicable to the client and not the labour broker.

Alternative estimates obtained through the Confederation of Associations in the Private Employment Sector (CAPES) suggest that almost 850 000 workers are currently employed by labour brokers. While it is difficult to accurately predict employers' responses to the repeal of section 198, some of these workers may lose their jobs if employers are unwilling to employ them directly.

Thus, while permanent employment may increase in response to the repeal of section 198, it is a fair assumption that total employment will decline. This will not only contribute to increased levels of unemployment in the country, but also deprive the households attached to these workers of a valuable source of wage income.

Secondly, if clients would like to continue utilising the labour supplied by workers previously employed by TES, they would have to employ these workers directly and incur the associated time and financial costs, which may ultimately result in a significant increase in the cost of doing business.

Specifically, evidence from the 2007 Labour Force survey suggests that the average wage of the TES employee was less than the national mean wage - this means that the fixed cost of hiring a worker will place a relatively higher burden on hiring lower-wage workers. The effect of significantly higher wage and hiring costs may thus also induce, in the aggregate, employers to hire fewer workers.

Thirdly, the proposed repeal of section 198, coupled with the proposed change in the definitions of employee and the new definition of an employer may induce uncertainty in the labour market and would in all probability increase the number of cases referred to the CCMA, the Labour Courts and civil courts. The potential increase in the case-load of these institutions will have significant budgetary implications.

Finally, the proposed amendment means that substitute employees will now be considered employees of the client and each individual client will now have to register the employee under the Compensation for Occupational Injuries and Diseases Act (COIDA) and the Unemployment Insurance Act (UIF), which would impose additional administrative costs on the Unemployment Insurance Fund (U IF) and the Compensation Fund.

The aim of the proposed repeal of section 198 is the protection of vulnerable workers who are currently being exploited under temporary employment arrangements. While it is difficult to identify exploited workers in the TES sector using data from the official labour force surveys, estimates from the 2007 LFS suggest that possibly more than 100 000 workers could be considered vulnerable if their relative wage-levels are used as a proxy for exploitation.

In addition, approximately 38000 workers in this sub-sector did not have a written employment contract and their employers did not contribute to UIF on their behalf. The repeal of TES may result in the improvement of wage-levels and employment conditions of at least a share of these workers.

The total number of employees that will be affected by the new proposed definitions of employee and employer will be determined by the exact interpretation of the clause - specifically how the requirement of "direct supervision" will be interpreted. In the first quarter of 2010, 12.8 million workers were employed in the South Africa labour market, with almost 75 percent employed in the formal sector, while informal sector employment accounted for a further 16.4 percent. Approximately nine percent of the workforce (or 1,2 million workers) were employed in Private Households - the majority as domestic Workers.

The QLFS does not record much detail on the nature of the employment relationship, but if we assume that the majority of domestic workers working in Private Households are directly supervised by their employer, these workers will continue to be considered employees for the purposes of labour legislation.

The informal sector includes small enterprises with only one or two employees working for an employer, but it is not clear to what extent these workers are directly supervised by their employer. Overall then, with the possible exception of domestic workers in Private Households and some workers in the informal sector, the majority of workers currently considered as employees (thus more than 75 percent of the workforce) may possibly cease to be employees under the new definition and will therefore be excluded from all statutory labour rights.

The proposed amendment to the definition of an employee and the introduction of a definition of an employer will also impose additional costs on the CCMA, Labour Court and Civil Courts, as more cases to determine if a person is actually an employee according to the new definition will be referred to these institutions.

Chapter Two presents the Regulatory Impact Assessment (RIA) Options Analysis of the proposed revisions to the penalties structure for non-compliance in the Draft Employment Equity Amendment Bill. For purposes of the RIA options analysis, the focus is on the possible impacts of the proposed option to increase fines for non-compliance, and specifically on the proposal to link fines to the annual turnover of the employer. The proposed changes to penalty fees associated with EEA non-compliance point to potentially far reaching economic impacts. Ten percent represents a considerable proportion of annual turnover.

A fine of this magnitude could pose a significant threat to the continued viability of a company. Possible unintended consequences may include the imposition of penalties contributing to company contraction and retrenchments, and even company closure, resulting in job losses and negative impacts on economic growth. An alternative option could be to link penalties for contravention of the Act to the employer's payroll.

Chapter Three deals with amendments which seek to combat unfair discrimination in respect of remuneration and other conditions of employment. It is noted that very few such claims have been brought. The proposed section 6(4) clarifies that cases of discrimination in terms and conditions of employment based on a proscribed ground such as race or gender can be lodged.

The new section 6(5) allows the Minister of Labour, on the advice of the Employment Equity Commission, to publish a code of good practice identifying the factors that should be taken into account in assessing the value of work. Section 10(6)(b) seeks to facilitate lower-paid employees, earning below a prescribed earnings threshold, to bring discrimination cases in the CCMA rather than the Labour Court which is currently the case.

The redrafted section 11 will further facilitate this category of unfair discrimination claims by making the burden of proof similar to that applied under PEPUDA. Proposed amendments to section 27 of the EEA will enable the Department of Labour to use the system for reporting on a wage differential as a mechanism for uncovering and combating discriminatory practices in respect of wages and remuneration. All of these amendments will facilitate the identification and combating of discriminatory practices.

Chapter Four analyses the proposed Employment Services Bill, focussing on section 10 dealing with foreign workers and section 11 dealing with the reporting of vacancies to the Employment Services of the Department of Labour.

While the provisions of section 10 seek to address the employment of foreigners in jobs that could be filled by South Africans, it is not evident how the proposed provisions are to be co-ordinated with the functions of the Department of Home Affairs in respect of the processing of work-permit applications for foreigner employees.

Section 11 deals with the reporting of vacancies and work opportunities by employers to the Public Employment Services (PES). It seeks to introduce a new mandatory obligation on employers to report vacancies which would be made explicit in regulation. This seeks to assist placing work-seekers who register under the Unemployment Insurance Act at labour centres.

A mandatory obligation to report vacancies will impose major resource constraints on the Department of Labour; under-resourcing will have significant inefficiencies for both employers and employees if longer periods are taken to fill vacancies. Neither the Bill nor the Explanatory Memorandum provides a clear articulation of the policy objectives underpinning these provisions and the related resource implications.

The Department has already commissioned a report which has concluded that the PESs are currently severely under-resourced in terms of funding, personnel and offices. It is pointed out that employers would utilise PESs as they involve no cost if they are sufficiently efficient.

In conclusion, it is noted that while the draft Employment Services Bill deals with both the provision of Public Employment Services through the Department of Labour and the regulation of Private Employment Services Agencies these topics could be included in separate legislation. It is suggested that legislation dealing with the regulation of Private Employment Services Agencies be developed so it can come into force simultaneously with any changes to the Labour Relations Act and other laws dealing with atypical employment. This would enable more detailed policy development work to be done on the supply and resourcing of public employment services.

Chapter Five presents a cost-benefit analysis of the amendments in the Draft Labour Relations Amendment Bill, 2010 which relates to the Commission for Conciliation, Mediation and Arbitration (CCMA). The objective of the majority of these amendments is to, specifically, promote access to speedy and efficient dispute resolution for vulnerable workers, and more generally, contribute to increased effectiveness and efficiency of the dispute resolution system.

In the majority of cases, the amendments will extend the jurisdiction of the CCMA and as a result increase the case-load of the Commission. This will, in turn, increase the operating budget of the CCMA. Whilst data constraints abound, the initial analysis suggest that in most cases the predicted financial costs to the CCMA are not fiscally unmanageable. In addition, the CCMA may be able to recoup some of the costs associated with certain amendments. Some possible unintended consequences, however, do remain - most notable the moral hazard problem around the Sheriff's deposit amendment.

In the main, however, these amendments would appear to be an attempt at simultaneously reinforcing the rights of vulnerable workers, whilst also increasing the efficiency and effectiveness of the dispute resolution system in particular and the industrial relations system in general.

Issued by the Democratic Alliance, January 16 2011. The full report can be accessed here.

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