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COSATU Submission on the Draft Employment Tax Incentive Bill
COSATU Submission on the Draft Employment Tax Incentive Bill
Presented to the Standing Committee on Finance on 15 October 2013
1.1. CONCERNS REGARDING THE PROCESS ............................3
2.1. COMMENTS ON SPECIFIC PROVISIONS..............................4
2.2. General Comments...............................................................9
The current labour legislative regime, entailing notably the Labour Relations Act of 1995 (LRA) and the Basic Conditions of Employment Act (BCEA) amongst other, represented a clear commitment to break away from the exploitation of the apartheid labour market. Notwithstanding this there continues to be significant disjuncture between the rights that workers have in law as opposed to what is enforced in practice, with South Africa remaining a country where super-exploitation is still possible.
The International Labour Organisation (ILO) reports that 33% of South African workers are in “low wage employment”, defined as those workers who earn less than two-thirds of the median wage. The Monthly Earnings of South Africans Report (2010) of Statistics South Africa reveals that, the bottom 5% of South African workers were paid less than R570 a month. This is in contrast to results of the Price Waterhouse Coopers Report (2010) on “Executive Pay in South Africa”, which found that more than half of executives in large JSE-listed companies earned more than R10 million per annum. Further, in 2010, half of South African workers earned less than R2800 a month. On average, 75% of South African workers earned R1939 in 2010 and 90% of South African workers earned an average R3327 a month. African workers earn 23% what white workers earn, and women earn 77% what men earn.
Income inequality has consistently increased with South Africa now commonly acknowledged as being the most unequal country in the world. Notwithstanding, the labour movement is facing an unprecedented onslaught with the usual myths being peddled regarding “inflexible” labour laws and excessive wage increases. The International Monetary Fund (IMF) in recent weeks has opportunistically jumped on the bandwagon calling for government to amongst others “rein in” trade unions and enter into “social bargain” based on commitments to wage restraint.
Much of this is premised on the incorrect assumption that the South Africa’s labour market is based on high wages. This is in direct contradiction to the ILO, which in fact supports a wage-led growth strategy. This is given further support in the United Nations Conference on Trade and Develop (UNCTAD) 2013 report, which in supporting wage growth as an ingredient in domestic-demand-driven growth strategy, states the following:
“Reducing the price of labour does not lead to the expected outcome of equilibrating demand and supply on the labour market, because lowering the price of labour (the real wage) not only reduces the costs of producing goods and services, but also the demand for those goods and services. Attempts to overcome employment problems by lowering wages and introducing greater flexibility to the labour market are bound to fail because they ignore this macroeconomic inter- dependence of demand and supply that causes the labour market to function differently from a typical goods market”
Our assessment of the Bill indicates that it entails employment subsidies in the form and structure that we have long maintained our opposition to on the basis of its adverse implications for the labour market. This is notwithstanding the labelling of the proposals as “employment tax incentives”. Earlier proposals from the Treasury limited the subsidy to young workers. However, it is now being proposed to expand the coverage even further to special economic zones and designated industries, raising additional concerns.
Accordingly COSATU is calling for the immediate withdrawal of the Employment Tax Incentive Bill, noting both our concerns around the process as well as the following general substantive concerns:
- The substitution or displacement of unsubsidised workers.
- The Facilitation of a multi-tiered labour market in respect of wages, benefits and overall employment conditions.
- Increasing the downward pressure on wage and collective bargaining as a whole.
- Promotion of the exploitation through atypical forms of labour such as temporary work, labour broking and subcontracting.
1.1. CONCERNS REGARDING THE PROCESS
We have serious concerns about the process and the speed with which Treasury intends to ram the Bill through Parliament, despite the Bill only recently being made public and the implications this has for genuine public consultation. Treasury has indicated in its media statement that it has taken into account “concerns raised in the NEDLAC consultations” on its “Confronting Youth Unemployment: policy options for South Africa” discussion paper. However, it fails to acknowledge that the NEDLAC process was not completed on the discussion paper.
NEDLAC was also not afforded an opportunity to consider the actual Bill, and hence the details of the actual form and structure of the subsidies that will be imposed. Further the proposals in the discussion paper were limited to only the wage subsidy for young workers. Whereas the Bill proposes an additional two subsidies that would be implemented in special economic zones (SEZs) and in industries designated at the Finance Minister’s discretion, that have not been subject to previous consultation publicly or through NEDLAC.
We note that Treasury has indicated that the Bill is intended to implement commitments made under the “Youth Employment Accord”. This is despite the fact that the Accord requires that any incentives be “approved by all constituencies.” It would be incorrect to state the proposals in the Bill have in fact been approved by all constituencies.
Additionally we must register our serious concern that these proposals were not tabled for discussion at the Economic Summit of the Tripartite Alliance that was held at the end of August. We find it strange that although Treasury indicated in early June 2013 that it intended to publish an Employment Tax Incentive Bill, it chose to publish this only after the conclusion of the Alliance summit.
Further it should be noted that as the Bill before Parliament is in a “draft” form, the “financial implications” have not been set out in a memorandum to the Bill, contrary to standard Parliamentary rules. It also means that the public consultation process will proceed in the absence of this information despite the fact that the Bill proposed to expand coverage of the employment subsidy to SEZs and designated industries as well.
2. SUBSTANTIVE CONCERNS
Generally we wish to note that the Bill is so poorly drafted, that it seems unlikely that anyone with credible labour law expertise was consulted in the drafting process. For example, there are various references in the Bill that attempt to align its provisions with the Labour Relations Act of 1995(LRA) and in particular to wage-setting mechanisms and unfair dismissal provisions. However, these are often worded in a manner that do not make sense and/or introduce elements of a multi-tiered labour market. Noting that this Bill is subject to extremely constrained Parliamentary timeframes as it is the year preceding national general elections, we have serious questions about whether there will be space to address the numerous technical problems in the Bill.
2.1. COMMENTS ON SPECIFIC PROVISIONS
2.1.1. The Types of Subsidies/Tax Incentives Proposed
Section 6 of the Bill provides for the three different types of subsidies or so-called tax incentives for up to 24 months, applicable to the following workers in the private sector and at designated public entities who earn a maximum of R6000 a month:
- Workers between the ages of 19 and 29, with this subsidy being applicable to nationally with no restriction geographically or to specific industries. This is commonly referred to as the youth employment subsidy.
- Workers of all ages employed in special economic zones (SEZs) with no limitation to specific types of industries.
- Workers of all ages in industries designated entirely at the discretion of the Finance Minister by a notice in the Gazette, with no geographic limitation. Here the Minister of Finance is not obliged to consult with the Ministers of Labour and Trade and Industry or any stakeholders including organised Labour. Neither is there any provision for criteria that would guide the Minister’s decision, which would take into account any implications for the labour market or industrial policy.
The operation of the subsidy entails qualifying employers retaining a portion of the employees’ income tax that would ordinarily have been paid over to SARS. However, the subsidy is applicable only in respect of workers who earn a maximum of R6000 a month, which is an employment category that pays no or minimal income tax. This means that the subsidies would be financed primarily by income taxes paid by unsubsidised employees.
The subsidies are capable of being applied retrospectively up to 1 October 2013, which is the earliest date from which (but not before) a worker may have been employed with the employer claiming the subsidy. This does not mean that a worker is precluded from having been previously employed by another employer. Accordingly contrary to the claims of Treasury the subsidies are not limited to new entrants into the labour market as a whole. In fact there is nothing preventing an employer from hiring an experienced worker and claiming the subsidy.
Further all of the subsidies are capable of being implemented concurrently with other incentives and support measures that an employer may receive. For example, employers in SEZs will benefit from other SEZ-specific incentives, such as the relaxation of customs and excise rules as well as support measures provided through the DTI (Department of Trade and Industry). These would be in addition to any general industry or sector support measures provided by the DTI, which would not be restricted in terms of age or to SEZs. This represents substantial potential monetary windfall gains for employers with no guarantee of meaningful job creation benefits.
The application of subsidies to SEZs and designated industries would likely have the effect of destroying employment in specific geographic regions as employers relocate to access the subsidy.
2.1.2. Downward Pressure on Wages
Fairly substantial amounts are proposed under section 7(2) of the Bill in determining the value of the subsidies. For monthly wages of R2000 or less, the value of the subsidy is 50 percent of the wage for the first 12 months. A flat rate of R1000 is applicable to wages between R2000 and R4001, with the subsidy tapering downwards from R1000 to zero for monthly wages between R4000 and R6000. Even though under section 7(3) the value of the subsidy is halved during the second year of employment, the amounts remain substantial.
This means that even where the remuneration for earning is the same between subsidised and unsubsidised workers, there will be considerable difference in costs for the employer between the two categories. This will invariably place a downward pressure on the wages of unsubsidised workers, who ironically would be providing the financing impetus for this consequence.
Employers may also opt to forgo accessing benefits of the subsidy directly and instead allow for workers to be placed through labour brokers or subcontractors. The labour brokers and subcontractors would instead access the subsidies as employers, enabling them to provide labour at a discounted rate and in direct competition with directly employed workers at the workplace. We note that our concerns are still applicable despite the proposed amendments to the LRA currently before Parliament that deem workers to be a directly employed by a so-called client once a labour broker placement exceeds three months, since remuneration will continue to be paid through a labour broker and not directly.
Further it would appear that the above formula actually incentivises low wage setting and exploitation. It is best explained in considering the application of the subsidy to the category of wage earners between R2000 and R4001. For example, an employer who pays an applicable worker a monthly wage of R4000 would receive the value of R1000 as a subsidy. Whereas if two employees were each employed at half the rate of R2000 a month, the total remuneration cost for the employer would again be R4000. However, in this instance the subsidy would be doubled to R2000.
2.1.3. Displacement/Substitution of Unsubsidised Workers
In terms of sections 5(1) and 5(3) (a), employers will be disqualified from receiving the subsidy should they be “deemed to have displaced an employee”. This would require a finding in terms of section 5(1) (b) by the CCMA (Commission for Conciliation Mediation and Arbitration), bargaining council or court that the employer unfairly dismissed the employee in order to receive the incentive. This dismissal would then consequently constitute an automatically unfair dismissal in terms of section 187(f) of the LRA on the basis that of unfair discrimination.
This clause is an apparent attempt to protect existing unsubsidised employees from being displaced in order for employers to access the subsidies. However, this will be extremely difficult for employees to enforce in practice as outlined below.
What is especially stark is the absence of a provision for any criminal penalties for what would essentially constitute an act of fraud. On the whole section 5 provides little but illusory protection aimed at placating trade unions and unsubsidised workers about the very real threat of substitution.
a) Burden of Proof
The burden of proof would rest with the employee not only to prove an unfair dismissal but additionally that the dismissal was aimed at accessing the incentive. No employer would admit to the real reason for dismissing an employee and would likely make allegations of misconduct or poor performance.
Further the matter may also take years to resolve should either party take the matter on appeal. This may even extend beyond the duration of the subsidy that would have been applicable. As the Bill is silent on the implications of what happens during the intervening process, our interpretation is that the subsidy may continue to be claimed up until an adverse and final decision has been made by the relevant institution or court.
b) Absence of an Enforcement Mechanism
Furthermore it is unclear what mechanism will be used to trigger the disqualification under section 5(1). A decision that there has been an automatically unfair dismissal would not have the immediate legal effect of bringing section 5(1) into operation. More specifically the Labour Courts, CCMA and bargaining council do not have jurisdiction in terms of tax legislation and would not be able to impose a disqualification in terms of section 5(1). What is the process of communicating or transmitting a decision of a court, bargaining council or CCMA to the South African Revenue Service (SARS), which it would be assumed would be responsible for enforcing this or other penalties? Surely this cannot be left up to the employee that has been unfairly dismissed. In the absence of a formal process it can only be assumed that the proposed disqualification would in fact never be enforced in practice.
Section 5(3) (b) provides for the imposition of a 150 per cent penalty of the total amount of the employment tax incentive received in the preceding 12 months. However, the enforcement of this provision suffers from a similar impediment as the disqualification under section 5(1) in that there is an absence of an enforcement link between a finding of an automatically unfair dismissal and the penalty.
c) Displacement is Possible for All THREE Subsidies
The link between section 5(1) (b) and section 187(f) of the LRA on “automatically” unfair dismissals is on the whole poorly drafted. This section has a very narrow application to very specific instances of unfair dismissals such as unfair discrimination. In this instance it is evident that the drafters sought to link unfair discrimination on the basis of age to displacement linked to the youth employment subsidy. Here the error is made that displacement or discrimination is based on the grounds of age. This is as opposed to the real basis for differentiation, namely that between subsidised and existing unsubsidised workers irrespective of age.
Displacement or substitution is in fact possible for all three types of subsidies. In terms of section 6(1) (e) each of the three subsidies is applicable to only those employees who are newly appointed after 1 October 2013. On what grounds of unfair discrimination and consequently automatically unfair discrimination will disqualification be applied to in respect of employment subsidies applicable to SEZs or designated industries?
d) Evasive Legal Mechanisms
Employers have long resorted to creative legal mechanisms to evade compliance with labour law compliance, often relying on restructuring of the workplace or employment contracts. In this instance nothing prevents employers, especially larger ones, from restructuring a workplace and shuffling workers around so that subsidised workers are not placed in those units or positions where the dismissal has taken place. In such cases linking the dismissal to the subsidised position will be difficult.
An even bigger risk would relate to employers retrenching workers and allowing for outsourcing through subcontractors or labour brokers, who would become the new employers. As it would not have been the labour broker or subcontractor who dismissed the employees the disqualification in terms of section 5(1) would not be applicable. In fact it would even be possible for a labour broker or subcontractor to place the same dismissed worker, with no recognition of previous service, and access the subsidy.
2.1.4. Compliance with Sectoral Determinations and Bargaining Council Agreements
Section 4(1) It states that employers will only receive the subsidy where employees are paid in accordance with the “minimum wage” set down through bargaining councils` agreements or sectoral determinations. Where neither of these is applicable a R2000 minimum wage would be applicable under section 4(2). It would appear that that while these provisions are intended to promote compliance with minimum wages setting mechanisms. However, it is evident from the text that the drafters are not familiar with the institutional mechanisms and processes involved in wage setting and have consequently inadvertently enabled the imposition of a multi-tier labour market.
Our technical concerns are summarised as follows:
- The Bill makes provision for bargaining councils and sectoral determinations, but fails to recognise that there are sectors where there are no bargaining councils and which nevertheless have collective agreements negotiated at company level. Obvious examples of these include mining and retail sectors. Based on the drafting in the Bill, such collective agreements would not be applicable to the remuneration of subsidised workers who would instead be allowed to be remunerated at R2000 as per section 4(2).
- There is a failure to recognise that individual workplaces may pay higher “actual wages” than the minimum set down though bargaining council agreements, sectoral determinations or the R2000 minimum set down under the Bill. This would effectively allow for subsidised workers to be paid less than unsubsidised workers in relevant workplaces even if they do the exact same work, thereby laying the basis for a multi-tiered labour market.
- Compliance with section 5 is limited to compliance with minimum “wages”, failing to acknowledge that determinations and collective agreements extend to other employment conditions as well such as retirement benefits, medical aid and leave. These would in many instances translate into financial benefits for workers who are recipients. Whereas section 5 would allow for subsidised workers to be excluded from these benefits, further laying the basis for a multi-tiered labour market.
- Certain employers apply and receive exemptions from bargaining council agreements. Where such employers are already benefiting from such exemptions it would appear that they would nevertheless be able to extract a further unwarranted financial benefit through the subsidy.
- The Bill is completely silent on how SARS intends to monitor compliance with minimum wages. As with the provisions applicable to displacement we can only assume that there will be little or no implementation of this provision.
- The wording of the section 4(1) (b) is odd as it refers to a bargaining council agreement that has been “extended by the Minister of Labour” in terms of section 32 of the LRA. Bargaining council agreements are in fact concluded between parties to the bargaining council, namely the relevant trade unions and employer organisations. The Minister of Labour is not part of that process, but may extend an already binding bargaining council agreement to “non-parties” on application by the parties. However, the wording of section 4(1) (b) seems to imply that only extended bargaining council agreements would be applicable. Other bargaining council agreements may be disregarded even by parties who would then implement the default minimum of R 2000.
2.1.5 Roll-over of Amounts
As noted earlier the subsidy would essentially be financed through the income tax paid by unsubsidised workers who fall into an applicable income tax threshold. In recognition of the fact that the subsidies claimed may in certain instances exceed the total income tax collected from other unsubsidised employees, section 9 of the Bill allows for the employer to “roll-over” or claim these amounts in subsequent months. This is a reflection of the substantial value that is being gifted to employers in order to further exploitation and with likely minimal benefits in employment creation.
2.2. General Comments
It is a serious problem that none of the subsidies are linked to mandatory skills development or training. It is likely that many subsidised workers will be appointed to low skilled positions, allowing for easy replacement once the subsidy is no longer applicable. The level of skills and experience gained may be of limited assistance in finding further employment.
Further there is nothing in the Bill to promote permanent employment, as the subsidy may be claimed for both temporary and part time workers. It is also evident that this Bill will enable and promote the use of subcontracting and labour broking. This, combined with the applicable wage categories, would in effect target the workers most vulnerable to exploitation through such arrangements.
We have noted in detail the technical problems evident in the drafting of the Bill. Aligning and ensuring compliance with the labour laws requires more than the arbitrary selecting random sections from the LRA. Technically there is minimal protection afforded to maintaining labour standards, notwithstanding the poorly drafted sections of aimed at placating the fears of organised labour.
We note that section 11 provides that the subsidies or so-called employment tax incentive will only be applicable until 1 January 2017. However, we can draw no comfort from this clause as a simple amendment before that date will allow it to be extended further.
COSATU remains of the view that confronting youth unemployment will require addressing unemployment in general. It is relevant that the 2013 World Bank Development Report draws the conclusion that wage subsidies in general have minimal impact on job creation. Consequently the subsidy is inefficient as there is significant potential for deadweight losses in respect of businesses that would have employed workers regardless of the subsidy. It is also premised on the incorrect assumptions that wages in South Africa are too high and that this acts as a specific disincentive to hire youth, whereas studies by organisations like the Alternative Information and Development Centre indicate that young workers are already hired at discounted rates of as much as 20%.In our view the Employment Tax Incentive Bill will in practice translate into a fundamental attack on the security of employment of workers, decent work standards and collective bargaining rights. It will also have minimal benefits for those workers at whom the subsidies are supposedly targeted. Accordingly COSATU is committed to resisting the passing and implementation of the Bill and will make an urgent political intervention through the alliance to stop it going ahead.