EMPLOYMENT EQUITY:
STRICTER RULES AND BIGGER FINES
PUT FIRMS AND JOBS AT RISK
South African Institute of Race Relations
Submission to the
Parliamentary Portfolio Committee on Labour
on
the Employment Equity Amendment Bill of 2012
Johannesburg, 14th December 2012
SYNOPSIS
Proposed new provisions under the Employment Equity Amendment Bill (the EE Bill) of 2012 could see many firms fined severely for failing to meet unrealistic racial quotas. This is likely to worsen the crisis of unemployment and give yet further impetus to labour unrest and social instability.
Under the EE Bill, fines for failing to meet racial quotas are to be greatly expanded. At present, the maximum fine for a failure to meet racial targets is R500 000 for a first such ‘offence’, rising to R900 000 for a fifth such failure within three years.
By contrast, under the EE Bill, maximum fines will be R1.5m or 2% of annual turnover, whichever is the greater, for an initial failure to meet a racial target. If firms remain unable to meet racial quotas, they will soon face maximum fines of R2.7m or 10% of their annual turnover, whichever is the higher.
Such penalties are extraordinarily severe, especially when no real criminal misconduct is in issue. In addition, as Government’s own regulatory impact analysis warned in 2010, these fines are high enough to put many firms out of business. This could push thousands of people out of their jobs and worsen the crisis of unemployment in the country.
The Employment Equity Act of 1998 requires “designated” employers – those with 50 employees or more, or with annual turnover above specified thresholds – to “achieve employment equity” by increasing African representation among managers to 75%, the African share of the economically active population.
However, this target is very difficult to fulfil when only 3% of Africans have tertiary qualifications and only 25% fall within the 35-64 age cohort from which managers are usually drawn.
The EE Bill ignores these factors in tightening up enforcement procedures, stripping away defences, and pushing up penalties
At the same time, millions of poor black South Africans will never be able to benefit from racial set-asides for management posts. What they need, rather, are skills, fixed investment, and jobs. But the economy will never generate employment on the scale required while the private sector remains trussed up in unrealistic racial requirements.
It is time to call a halt. The EE Act is deeply flawed and cannot be ‘fixed’. Instead of tightening it up, the Government should jettison it as part of a big shift from redistribution to growth – from a focus on enriching the relatively few to removing the obstacles to the advancement of the many.
Introduction
The Employment Equity Act of 1998 (the EE Act) requires ‘designated’ employers (those with 50 employees or more or annual turnover above specified thresholds) to ‘achieve employment equity’ by increasing black representation at management and other levels to the point where this matches the proportion of black people (Indians, coloured people, and Africans) in the country’s economically active population (EAP).
Since Africans make up 75% of the EAP, this is the target for African representation at management levels which employers are expected to meet. However, this target is unrealistic and difficult to attain, if only because the African population is both youthful and, for historical reasons, poorly skilled. Hence, relatively few Africans (3%) have the tertiary qualifications generally considered appropriate for management posts, while only 25% of Africans fall within the 35-64 age cohort from which managers are usually drawn.
The EE Act partially recognises the difficulties firms face in meeting racial targets in these circumstances by obliging the Department of Labour (DoL) to take account of the skills shortage in seeking to enforce the statute against non-compliant employers. However, these provisions, which provide at least some level of protection for firms against the unrealistic expectations of the EE Act, are to be removed under the Employment Equity Amendment Bill of 2012 (the EE Bill) tabled in Parliament in October 2012.
The EE Bill also introduces a number of other changes with negative implications for economic growth and the generation of new jobs. If it is adopted in its current form, then employment equity requirements – which already benefit only a relatively small elite within the black population, while making it more difficult for the poor and unskilled to find jobs and income – are likely to generate yet further hardships for the majority of South Africans.
Key differences between the EE Act and the EE Bill of 2012
Wider grounds of unfair discrimination
The current EE Act bars all employers from unfairly discriminating against either employees or job applicants on racial or 17 other listed grounds (including age, disability, language, and HIV status). By contrast, the EE Bill bars unfair discrimination not only on these 18 listed grounds but also on ‘any other arbitrary ground’. [Section 3, EE Bill; Section 6, EE Act] This catch-all provision greatly widens the grounds on which employers can be accused of unfair discrimination.
A reverse onus of proof in most circumstances
Under the current EE Act, as soon as an employee or job applicant ‘alleges’ unfair discrimination on the part of an employer, the onus shifts to that employer to disprove the allegation. [Section 11, EE Act] Under the EE Bill, a reverse onus of proof will continue to apply wherever unfair discrimination on one of the 18 listed grounds is ‘alleged’.
Employers will thus remain vulnerable to ill-founded accusations of unfair discrimination on any of the 18 grounds listed in the EE Act. They will then have to disprove these accusations in the manner now specified in the Bill – by showing, on a balance of probabilities, that ‘such discrimination did not take place as alleged, or that it is rational and not unfair, or is otherwise justifiable’.
Retaining a reverse onus of proof which kicks in as soon as unfair discrimination is merely ‘alleged’ encourages vexatious accusations against firms. It also disregards the normal legal principle that he who alleges wrongdoing must prove it. [Section 6, EE Bill; Section 11, EE Act]
It is only where unfair discrimination ‘on an arbitrary ground’ is alleged (under the new catch-all provision), that the onus of proof rests on the complainant to substantiate the accusation made. In these circumstances, ‘the complainant must prove, on a balance of probabilities’, that the conduct complained of is ‘not rational’, that it ‘amounts to discrimination’, and that ‘the discrimination is unfair’. [Section 6, EE Bill; Section 11, EE Act]
This wording provides some protection for employers against unfounded allegations. Hence, it would be far preferable if this onus of proof was placed on all complainants alleging unfair discrimination by employers, whether on arbitrary or listed grounds.
Pay differentials
Equal pay for work ‘of equal value’
The EE Bill breaks new ground in stating that differential pay for work that is substantially the same or is ‘of equal value’ amounts to unfair discrimination, provided that the difference in remuneration is based on a listed ground (such as race, age, or HIV status) or on ‘any other arbitrary ground’. [Section 3, 2012 Bill, section 6 of EE Act]
This provision may make it more difficult for employers to reward experience or productivity. It could also outlaw the common business practice of paying premiums of up to 30% to attract and retain skilled black managers.
Disproportionate income differentials
The EE Act already obliges ‘designated’ employers to report on ‘disproportionate income differentials’ as between management and subordinate staff. It also requires them progressively to reduce such differentials under ‘the guidance’ of the labour minister. [Section 27, EE Act] The 2012 Bill preserves this provision, but adds that designated employers must also progressively reduce any pay differentials for work of equal value that amount to unfair discrimination. [Section 12, EE Bill; Section 27, EE Act]
Under the Bill, the minister of labour will be empowered to lay down criteria for assessing when work is to be regarded as having ‘equal value’. [Section 3, EE Bill; Section 6, EE Act] There is little in the Bill to prevent her from laying down criteria that are overly broad and subjective, especially as her decisions will not be subject to parliamentary scrutiny.
Different turnover thresholds for ‘designated’ employers
Under the EE Act, ‘designated’ employers are defined as those with 50 employees or more, or with annual turnover above specified thresholds. The EE Bill retains this definition, but raises the relevant turnover thresholds for the first time since 1999.
In agriculture, for instance, the relevant threshold is to change from R2m in annual turnover to R6m. In mining and quarrying, it will rise from R7.5m to R22.5m, while in both the manufacturing and the finance sector it will increase from R10m to 30m. In construction, the threshold will rise from R5m to R15m. In the retail and motor trade it will go up from R15m to R45m.
The increased thresholds will mainly compensate for the effects of inflation over the last 13 years. Though they may allow more firms to avoid the particularly onerous obligations resting on all ‘designated’ employers under the EE Act, the new thresholds will again give firms a reason not to expand beyond these limits. This perverse incentive is the opposite of what the economy and the jobless poor require.
Penalties
The 2012 Bill substantially increases the penalties applicable to designated employers who fail to draw up or employment equity plans or meet the racial targets envisaged in the EE Act.
At present, maximum fines for ‘offences’ of this kind range from R500 000 for a first transgression to R900 000 for a fifth similar transgression within three years. Under the EE Bill, by contrast, maximum fines for any failure to meet specified racial targets will start, for a first contravention, either at R1.5m or 2% of annual turnover, whichever amount is the greater. For a fifth similar contravention within three years, maximum fines will be either R2.7m or 10% of annual turnover, whichever is the larger. [Section 27, EE Bill; Schedule 1, EE Act]
Fines of this magnitude will also apply to designated employers who fail to:
· submit their employment equity reports to the Department of Labour every year; (At present, larger employers with 150 employees or more need submit reports only every two years, but this will fall away under the Bill.) [Section 11, EE Bill; Section 21, EE Act]
· adopt successive employment equity plans; or
· implement any measures the director general of labour has instructed them to undertake to enhance their compliance with the EE Act. [Section 27, EE Bill; Schedule 1, EE Act, Section 44, EE Act]
Fines ranging from R1.5m to R2.7m (but without the alternative of a higher fine based on annual turnover) will also apply to designated employers who fail to:
· analyse their workforces to assess the degree to which black people are under-represented within them; [Section 27, EE Bill; Schedule 1, EE Act]
· assign senior managers to implement their employment equity plans;
· put up workplace notices informing employees about the EE Act;
· keep prescribed records; or
· supply the director general of labour, on request, with details of their employment equity plans or other relevant records.
These proposed fines are extraordinarily severe – and especially so when no real criminal misconduct is in issue. They could also (as the Government’s own regulatory impact analysis has warned) prove high enough to put many firms out of business.
Available defences
Under the current EE Act, the director general or the Labour Court, in seeking to enforce the fulfilment of racial targets, must take account of the skills shortage by noting the size of ‘the pool of suitably qualified people from designated groups from which the employer may reasonably be expected to promote or appoint employees’. They must also consider relevant economic factors in the sector, along with the financial circumstances of the employer and ‘the progress made by other designated employers operating under comparable circumstances’.
[Section 42, EE Act]
The 2012 Bill repeals these provisions. Instead, it puts the onus on the employer to show what ‘reasonable steps’ he has taken to appoint, promote, and train black people and implement his employment equity plan. In addition, in a departure from the terms of the 2010 bill, the employer is now entitled to ‘raise any reasonable ground to justify his failure to comply’.
This last clause makes it possible for the employer to cite skills shortages and economic factors in his defence. However, the onus will now lie on him to prove that such factors give him ‘reasonable grounds’ for failing to meet racial targets. This burden of proof might not be easy to discharge, especially if the Department of Labour persists in dismissing the skills shortage as nothing but an ‘urban legend’ (to cite what Jimmy Manyi, then director general of labour, said in 2007). [Anthea Jeffery, Chasing the Rainbow: South Africa’s Move from Mandela to Zuma, Johannesburg, South African Institute of Race Relations, 2010, p157]
The 2012 Bill, in another departure from its 2010 predecessor, also empowers the minister of labour to introduce a code of good practice setting out ‘factors that must be taken into account’ in assessing compliance with racial targets and other requirements of the EE Act. This clause could open the way for skills shortages to be taken into account once again. However, there will clearly be no obligation on the minister to bring back, via a code of good practice, the very factors the Bill has expressly deleted.
Enforcement procedures
The EE Bill of 2012 echoes its 2010 predecessor in tightening enforcement procedures. Under the current EE Act, a labour inspector must begin the enforcement process by seeking ‘an undertaking to comply’ from the relevant employer. Thereafter, the inspector may issue a compliance order, against which the employer may object to the director general of labour or appeal to the Labour Court. This compliance order cannot be executed until it has been made an order of the Labour Court. [Sections 36, 37, 39, 40, 50, EE Act]
Enforcement under the current rules thus involves a number of procedures. By contrast, under the 2012 Bill, labour inspectors will have a choice as to whether or not to start the enforcement process by seeking an undertaking to comply from an employer. The Bill will allow inspectors to leapfrog this initial procedure; and to start instead by issuing a compliance order against an employer alleged to be in breach of the EE Act. In addition, where an employer has allegedly failed to fulfil the racial targets set out in his employment equity plan, the director general of labour will be able to go directly to the Labour Court to seek an order punishing him for this transgression. [Sections 10, 11, 13, 14 Bill; Sections 20, 21, 37 EE Act]
If significant corporate crimes were in issue, the tightening up of enforcement procedures might be merited. Instead, however, the EE Act requires the fulfillment of racial targets which skills shortages and the age profile of the African population make very difficult to meet. In circumstances such as these, enforcement measures should not be made more onerous.
Foreign blacks
The current EE Act does not distinguish between South African blacks and those coming from other countries. Given the skills shortage among local black people, many employers have managed to meet their racial targets, in part at least, by appointing or promoting black people from elsewhere in Africa or even further afield.
The appointment of foreign blacks with scarce skills has helped firms meet the EE Act’s racial quotas without jeopardising efficiency. However, such appointments also contradict the intended purpose of the statute, which is to provide redress for the victims of apartheid – not for foreigners who never suffered under National Party rule. The 2012 Bill thus makes it clear that the black people entitled to its benefits must either be South African citizens by birth or must have acquired such citizenship by naturalisation prior to the political transition in April 1994. [Section 1, EE Bill of 2012]
This clause is necessary to uphold the (supposedly) remedial purpose of the EE Act. However, it will also make it more difficult for businesses to meet their racial quotas without compromising competitiveness.
National or regional demographics
The current EE Act says that the extent to which employers have complied with their racial targets must be assessed, among other things, with reference to ‘the demographic profile of the national and regional economically active population’. [Section 42, EE Act] This wording allows employers to take account of regional demographics wherever these differ significantly from national ones. This has particular salience for coloured people in the Western Cape, who make up some 55% of the economically active population (EAP) in the province but only 11% of the national EAP. Hence, coloured people in the Western Cape could battle to find jobs or win promotions if the coloured quota in the province were to be set at the national level of 11%.
The 2012 Bill, unlike its 2010 predecessor, retains the current EE Act provision entitling employers to take account of regional demographics. This suggests that the Government has backed down in response to the criticism it faced over its attempt, in the 2010 bill, to delete any reference to regional demographics. (The controversy was heightened by Mr Manyi’s earlier remarks that coloured people were ‘over-concentrated’ in the Western Cape – the only province outside the control of the ruling party – and should ‘move away’ if they wanted to find work.) [Mail & Guardian 24 February 2011]
However, whether regional demographics will remain relevant is in fact uncertain. Under the 2012 Bill, the minister is empowered, ‘after consultation’ with the Government, business, and labour at the National Economic Development and Labour Council (Nedlac), to issue regulations specifying the circumstances in which either national or regional demographics are to be taken into account. This wording will allow the minister to bypass Parliament and ignore the views of Nedlac in setting the relevant rules. It could also make it possible for the Bill’s reference to regional demographics to be overridden by new rules.
Restriction on atypical employment
The current Bill bars people from working for clients as the employees of labour brokers for longer than six months. This is a significant improvement on its 2010 predecessor, which sought to prohibit labour broking altogether. However, the six-month time limit is essentially arbitrary, as Business Unity South Africa (Busa) has noted. Busa has also warned that ‘over-regulation of atypical employment’ will inevitably result in job losses, and has further cautioned against ‘raising the cost and complexity of conducting business’. [Business Day, The Times 28 March, Financial Mail 6 April 2012]
According to Adcorp (a private employment agency and labour broker), casual work and labour broking have played a vital role in countering unemployment and helping people to find jobs. Labour brokers and other private employment agencies, says Adcorp, have ‘introduced 5.4m people to the world of work since 2000’. Labour broking is now a R45bn industry, which employs around 20 000 internal staff, keeps about 1m people in temporary jobs on any given day, and makes it possible for 40% of these workers to move to permanent posts within three years. The sector is thus a vital ‘stepping stone for inexperienced black youth into formal permanent jobs’, it says. [Business Report 20 March, Financial Mail 6 April 2012]
With the youth unemployment rate already standing at around 50% -- and the overall jobless rate standing at some 25% -- it makes little sense to restrict labour broking and thus close off one of the few avenues through which first-time work seekers can find jobs and improve their workplace skills. This clause (like its counterparts in other labour bills currently proceeding through Parliament) could thus make the country’s high unemployment rate even worse, especially among the youth.
The dangers in tightening labour laws yet further
The EE Act is one of three labour statutes adopted since 1994 (the other two are the Labour Relations Act of 1995 and the Basic Conditions of Employment Act of 1997) that give inordinate legal protection to employees at the expense of employers. The EE Act is arguably the most onerous of the three, for the racial targets it expects employers to fulfil are very difficult to meet in the face of the skills shortage and the age profile of the African population. In addition, penalties for failure to meet targets or other obligations are already severe and will be pushed up very much higher by the Bill.
Tightening up the EE Act (and other labour laws) makes little sense when the unemployment rate remains at around 25% (on the strict definition) and labour laws are already known to have helped price millions of unskilled people out of jobs. What is needed is not the ratcheting up of restrictions but rather wide-ranging reforms that will help promote rapid economic growth and stimulate the generation of new jobs.
It is only through growth and jobs that the Government can realistically hope to roll back the current crisis of unemployment. The minister of finance, Pravin Gordhan, recognised this reality in February 2012 when he wrote: ‘It is jobs [that] are fundamental to people’s lives…and their ability to improve their living standards’. [Business Day 7 March 2012] But new jobs are unlikely to arise on any scale without comprehensive reforms to labour regulation, including employment equity requirements.
At least some in the Government see the need for reform. In November 2011 Trevor Manuel, minister in the presidency for the National Planning Commission, urged the ‘loosening of labour regulations to encourage companies to hire more people’. [Business Day 17 November 2011] In similar vein, Mr Gordhan wrote in February 2012 that ‘labour market reforms can directly improve employment by providing flexibility and the right incentives to hire workers’. According to Mr Gordhan, though no single policy change can hope to solve the massive unemployment problem, ‘what is needed now is a comprehensive set of reforms that maximise job creation’. [Business Day 7 February 2012]
Adds Herman Mashaba, a wealthy entrepreneur who succeeded in building up his ‘Black Like Me’ enterprise, even in the face of apartheid restrictions: ‘We are failing to recognise that for jobs to really happen in any country,…a government must create an enabling environment [with] incentives for business to employ people. Business people cannot be forced by legislation to employ… Right now we are coming with legislation to punish employers, [when this] can’t work… The Government and labour unions must recognise that certain provisions in the labour laws contribute to unemployment and have to change.’ [Sunday Times 18 March, Business Report 12 April 2012]
Instead, the EE Bill seeks to punish employers via ever heavier fines and yet more onerous administrative and reporting obligations. Hence, though the EE Bill is better in some ways than its 2010 predecessor, it is still a major step in the wrong direction.
For the past 18 years, the ruling African National Congress (ANC) has put its emphasis on redistribution, rather than on promoting economic growth. But a different way of dividing up the existing economic pie – without expanding it as well – will never be enough to meet the needs of a growing population. By contrast, as Gill Marcus, governor of the South African Reserve Bank, noted at a recent conference: ‘Growth matters. With growth of 7%, you double your income every ten years. With growth of 3%, it takes 24 years to double your income.’
Employment equity and other forms of redistribution help confine South Africa’s growth rate to around 3% a year. At this rate of growth, as Ms Marcus says, it will take a quarter of a century for the size of the economy to double. Through this long period, it will be the poor who pay the price for the hobbling of the country’s potential.
The EE Act is deeply flawed, and it cannot be ‘fixed’. Instead of tightening it up, the Government should jettison it as part of a big shift from redistribution to growth – from a focus on benefiting the few to removing the obstacles to the advancement of the many.
South African Institute of Race Relations 14 December 2012
