COSATU
Ministerial Determination: Small Business

1. Introduction
COSATU welcomes the opportunity to address the Portfolio Committee on Labour in relation to the Ministerial Determination: Small Business [No. R. 1295] ("the Determination"). The conditions of work of employees in small businesses obviously affect significant sections of our membership. The Ministry of Labour ("the Ministry") estimates that about half a million workers will be affected by the Determination. Over and above workers who are directly covered, there are likely to be indirect spin-offs for workers more broadly.

COSATU would like to make clear at the outset that we are opposed to the Determination in principle, since it undermines the fundamental goal of extending rights to all workers and sets a precedent which will become a slippery slope, even if this is not intended. The downward variation and the shifts towards employer-employee agreements provided for in the Determination undermines the architecture of our labour legislation.

We will find it difficult to explain to our members who happen to be employed in micro enterprises, as no doubt will members to such constituents, why such workers will not qualify for the full entitlements of the Basic Conditions of Employment Act (BCEA) when other workers doing the same job in a slightly larger firm do qualify. As we said in our initial press statement on the Determination, such workers will be asking the question, "Are we not workers enough?"

Given the massive unemployment and continued exploitation of workers, particularly vulnerable workers, it is unfortunate that we find ourselves discussing downward variation of the basic conditions which have been agreed to. Instead, we should be considering how to further protect workers and further accelerate the transformation of the labour market.

This submission examines the context within which the Determination arises, and looks specifically at the issue of flexibility and inflexibility within the labour market. We then examine the specific clauses of the Determination, and spell out the grounds for our rejection in each case. The Determination itself deals with its application, with an increase in the amount of overtime allowed and a reduction in the overtime wage rate, with a relaxation of the averaging of hours provision and the removal of this from collective bargaining, and with the removal of the right to family responsibility leave.

2. Overall approach to the Determination
2.1 The context of the Determination
President Thabo Mbeki, in his opening address to Parliament on 25 June 1999, suggested that there be a review of labour legislation. He identified the following areas:
- probation;
- remedies for unfair dismissal;
- dismissals for operational requirements;
- the extension of bargaining council agreements; and
- certain provisions of the BCEA. He did not specify which provisions of the BCEA.

President Mbeki stated that much of the commentary on the labour market and its actual or perceived impact on investment and job creation was ill informed or promoted a particular ideological and political point of view. He quoted the ILO study dismissing the arguments that our labour market is inflexible.

Various other processes and documents have presumably fed into the Determination under discussion. These would include the Impact Assessment of the BCEA commissioned from Ntsika Enterprise Promotion Agency, the Report of the Task Team appointed by the Minister of Labour ("the Minister") to investigate the impact of the BCEA on small business, and a report made to the Minister by the Employment Conditions Commission (ECC). With respect to the latter, it should be noted that while the Minister may make a determination on the advice of the ECC, the Minster is by no means bound by its recommendations.

COSATU also notes that we did, in our October 1997 submission on the Basic Conditions of Employment Bill, raise our objection to the possibilities for downward variation which the Bill provided for. We proposed a model that where variation does take place, a test of "on balance more favourable" should be applied. This would allow a degree of flexibility to parties in collective bargaining while not undermining the floor of basic rights.

Today’s submission is made in the context of workers’ job security being constantly under threat. The mining industry has seen thousands upon thousands of job losses. The manufacturing industry is devastated by retrenchments. Parastatals, like Transnet and Telkom, are proposing shedding tens of thousands of jobs. It is anticipated that central, provincial and local government will soon table proposals for the retrenchment of workers.

It seems tragically ironic that at a time when workers are most vulnerable and when they require the protections afforded by the law and collective bargaining more than ever, the dominant concerns are "freeing" businesses from the constraints of labour legislation and shedding the protections that workers enjoy. This is the result largely of a relentless campaign by in particular big business and their representatives in the media and the opposition political parties. The Minster and Department of Labour have battled to defend their programme of labour market transformation in the face of this onslaught, which has also been used to undermine the country as an investment destination.

Ironically, these calls for the rolling back of labour market transformation do so in the name of job creation and the interests of workers. The reality is that all it will do is to make workers more vulnerable to intolerable working conditions.

In the context of massive unemployment and the ongoing exploitation of workers, what should be under discussion today is how to accelerate the transformation of the labour market. Instead of focussing on who should be excluded from legislative protections and how business can be freed from the constraints of collective bargaining, COSATU suggests that ways should be investigated to strengthen and enhance collective bargaining and unions’ capacity to engage in these processes. This is critical when it comes to business restructuring and the employer-union dialogue associated with retrenchments.

2.2 General comments on the Determination
The downward variation contained in the Determination will apply to sectors where workers are extremely vulnerable to exploitation. Many of these workers are not organised, or they work in sectors where union organisation is very difficult. The amendment of this legislation will further worsen their intolerable working conditions.

The Ministry in its press statement justified the downward variation by reference to general dealers and small shop owners in townships. Workers in these businesses often work in insufferable conditions. The fact that the businesses are Black owned or are in townships does not justify the erosion of workers’ employment conditions.

The Determination is severely discriminatory against employees in micro enterprises, purely on the basis of their misfortune in finding employment in such companies rather than slightly larger ones. COSATU is of the view that the Determination may well be unconstitutional in this discrimination, and we are seeking further legal advice in this regard.

The statement by the Ministry claimed that the reason for this downward variation was to ensure that small businesses could operate more effectively. There is no credible empirical evidence to suggest small businesses are negatively affected by the impact of the BCEA. There is certainly no evidence to suggest that the erosion of workers’ conditions of employment in these sectors will lead to job creation. In fact, as we shall show, the Determination is more likely to lead to the destruction of jobs than to further job creation.

COSATU finds it surprising that wherever there is a discussion about developing small businesses, workers are the ones who are required to pay for this development by having their wages and conditions of employment eroded. Would it not be better to consider other incentives for small business development? COSATU believes – and this view has been expresses by various actors at different times, including by the Department of Labour ("the Department") – that the real obstacles to the growth of SMMEs and the employment expansion opportunities arising from this sector lie not in the labour market.

There are a number of obstacles to SMME development in South Africa at present, including lack of access to affordable credit, inadequate training, excessive competition from cheap imports, and the highly monopolised structure of the economy. Addressing these barriers would promote the growth of an SMME sector which can begin to reflect the dynamism and innovation of the most successful small business experiments, such as in countries like Italy, which promote human resource development as part of their growth path.

One justification which has been raised for the downward variation introduced through the Determination is that the South African labour market is in any event already multi-tiered. This is a disingenuous argument, in that it equates the nuanced variation incorporated into collective bargaining agreements on the basis on sub-sectoral or regional specificities, with formally legislated downward variation. The Determination takes a blanket approach and is not sensitive to differences in regional economic conditions, enterprise profitability etc. Furthermore, it needs to be made clear that even the variation provided for in collective bargaining agreements is the product of tough negotiations between employers and employees, and is never an ideal outcome from labour’s point of view. The objective of legislation such as the BCEA, however, is to provide for a basic floor of rights which should not be varied downwards. A determination such as the one under discussion today instead entrenches a dual market.

There will obviously be a need for extensive monitoring of the implementation of the Determination. The capacity of many South African businesses for evading legislation and evading or avoiding their tax obligations is well known. We envisage situations where companies with over ten employees use various means to try and qualify for the provisions of the Determination. The Determination may well have the effect of encouraging the disturbing trends towards outsourcing and casualisation (which we discuss more fully in the subsequent section). Substantial resources and specialised inspection capacity will be required within the Department to ensure that businesses which are not the intended targets of the legislation do not sneak in.

The Determination sets a dangerous precedent. The next target will be the core rights that are entrenched in the BCEA. There are good reasons why these rights were deemed to be "core" in the first place. Provisions such as those relating to hours of work are so fundamental that they should apply without downward variation. Contracting out of these rights is not contemplated, both because this would take advantage of unequal power relations in the workplace and because this would exert downward pressure on companies which do indeed implement the full entitlements. The BCEA has already made provision for companies to gradually adapt to these rights, for example through a phased in approach. COSATU would be strenuously opposed to any watering down of the core provisions of the BCEA.

2.3 Flexibility and inflexibility in the labour market
Business and opposition parties assert that the labour market is too rigid and that "high labour costs" hamper their competitiveness. According to this view labour market rigidities are "deterring foreign investors and strangling job creation in an economy where unemployment is running at about a third of the workforce." Further, the desire to promote labour market flexibility is premised on the notion that regulations and interventions cause distortions.

The argument from business and opposition parties rests on the philosophy that labour markets operate like other markets and that equilibrium can be obtained by influencing those factors that determine supply and demand. Hence a one-sided focus on regulation and trade unions which are seen as stumbling blocks to the functioning of the labour market. Furthermore, the debate has almost exclusively focused on labour market flexibility while overlooking the fact that labour markets operate within an economy characterised by structural problems that depress employment and efficiency. The structural crisis engulfing the South African economy, manifest for example in the high rate of unemployment, poverty and inequality, cannot be left to the market to address. It requires concerted intervention by the state to achieve equitable outcomes.

It is interesting to note that these commentators do not provide empirical evidence to back their claim about labour market rigidities and their supposed effects on employment creation and competitiveness. The claim that the labour market is too rigid flies in the face of studies by both the Department of Labour and the ILO which indicate that the labour market is too flexible in some areas.

A paper evaluating labour market deregulation in the OECD offers the following key lessons for South Africa. The most important observation regarding the causal link between deregulation and labour market outcomes such as employment creation is that

there is great uncertainty about the relationship between the institutional structure of the labour market and outcomes such as inequality, employment and productivity. Neither evidence nor theory supports the view that an attempt to create a ‘deregulated’ labour market in South Africa will automatically promote any of the policy goals to which the South African government has committed itself.

The call for "labour market flexibility" should be seen for what it is: an attempt to demonise the trade union movement as a destructive economic force, and to return to the days of the apartheid cheap labour system. This codified attempt to turn the clock back, and remove basic rights and protections for workers (in the name of flexibility) will lead to the entrenchment of apartheid’s economic rigidities which have acted as a fetter on the development of our country – the suppression of the creativity and potential of the majority of South Africans. This type of flexibility has led not to dynamism, innovation, and the unleashing of our productive potential, but to stagnation, and destruction of our human and natural resources.

The Department of Labour has in general pursued the correct strategy to maximise protection for workers at the bottom end of the labour market. In our view this is what growth with equity means. South Africa cannot narrowly and blindly sacrifice the living and working conditions of workers in blind pursuit of growth driven by cheap labour – apartheid pursued this route and failed.

While there is still too much flexibility and exploitation of low paid workers, there is a problem of rigidity in the upper echelons of the labour market, especially the managerial and professional strata. They use their access to scarce skills, and historically accumulated privileges to entrench their positions in a way that has led to huge disparities in incomes which are virtually unparalleled in other parts of the world. Due to years of apartheid isolation, South African companies have adopted labour repressive, top-down models of work organisation. Further, the level of management ability, important in work organisation design, is low by international standards.

The ILO study shows that our collective bargaining system is dynamic and allows for a degree of flexibility which accommodates a variety of economic conditions, while at the same time ensuring a viable framework for regulation of basic conditions. This study decisively discredits the allegation that the system of bargaining councils and centralised bargaining constitute an impediment to employment and economic growth. The study shows that the LRA is not stringent compared to other middle-income countries when it comes to dismissals. In other words numeric flexibility is not hampered by labour legislation. Further, the study also shows significant wage flexibility in the South African labour market which contradicts popular wisdom.

The rapid growth of sub-contracting, labour brokers and independent contracting is beginning to expose the fact that labour regulations may be too flexible as well as the need for more effective enforcement. According to the recent Ntsika report, about 300 000 workers have had their contracts changed to independent contractors over the past few years. This is part of the rapid recomposition of the workforce into insecure, casual and temporary workers, and reflects an international trend which other countries have had to regulate. These workers have little access to benefits, unions or effective minimum conditions.

Furthermore, there is the criticism that the collective bargaining system, and particularly the extension of agreements to non-parties, is a cause for negative labour market outcomes. Only 13% of formal sector workers (excluding agriculture) are covered by South Africa’s 76 bargaining council agreements. Most workers are not covered by union agreements, and are protected by only the most basic labour legislation. Furthermore, the system does allow for exemptions which are fully utilised by business. According to the ILO (1998) about 80% of applications for exemptions are approved. This figure is confirmed by a very recent study, which found that about 83.5% of applications for exemptions are approved. The problem is one of enforcement as smaller firms generally evade regulations. This brings into question the need to improve compliance with regulations.

The flexibility debate from business has centered on wage flexibility as well as numerical flexibility or the ease of firing workers and the extension of basic rights. In terms of the wage flexibility debate, numerous studies show little support for the argument that wage determinations and sectoral agreement impact on employment. Firstly, there are no national minimum wages in South Africa. Where minimum wages exist, these are invariably set below the actual wage rates paid in the sectors concerned.

The call for wage flexibility in order to create jobs and reduce poverty is also misplaced. While there is obviously a link between poverty and unemployment, there is also a link between poverty and poverty wages. About 37% of the formal sector workforce earns below the poverty line. The debate around wage flexibility has centred around wage rates at the lower end, totally ignoring the massive wage gap.

2.4 Economic empowerment and the transformation of the labour market
COSATU completely rejects a line of argument that, in order to promote black economic empowerment, workers should accept further "flexibility", either of wages or working conditions. Sensitive as this issue may be, we would like to tackle it in a bold and principled way. The working class, which in South Africa is predominantly black and African workers, has borne the brunt of Apartheid repression and continues to suffer poor working and living conditions. COSATU cannot accept a situation where these workers effectively subsidise the accumulation of wealth by an emerging middle and upper class. A "patriotic bourgeoisie" cannot be built on the back of low wages and poor conditions of employment. A central component of black economic empowerment – alongside the accelerated deracialisation of business – is the improvement in working conditions and remuneration for South African workers.

The programme of labour market transformation which has been undertaken by the Department of Labour since 1994 – with its flagship pieces of legislation being the Labour Relations Act, the Basic Conditions of Employment Act, the Skills Development Act and the Employment Equity Act – has taken this empowerment forward monumentally. These advances need to be built on rather than eroded.

3. Application of the Determination
COSATU rejects the definition of small enterprise as only referring to enterprises that have less than 10 employees. In the Employment Equity Act, 1998 the threshold for employers is not only the number of workers in the business, but also the enterprises’ turnover. Similarly in the Small Business Act, small medium and micro enterprises are each defined in terms of annual turnover and total assets as well as number of employees. Why are these other criteria ignored when it comes to employment conditions?

COSATU fears that medium size enterprises will now restructure themselves into a myriad of smaller commercial legal entities in order to gain the advantage of the downward variation. Clauses 1.6 (c) and (d) go some way in trying to prevent this by excluding any employer who conducts more than one business, and any business formed by the division or dissolution of an existing business. We are, however, still concerned and find the wording unsatisfactory for three reasons.

Firstly, the way that an employer will split its enterprise is to create several companies or close corporations. Each company or close corporation becomes a new employer with a separate legal personality. It is therefore irrelevant to say that it does not apply to an employer who conducts more than one business because each business will have a separate employer.

It may be argued that clause 1.6(d) solves that problem. But this subclause requires an actual splitting or division of an existing business. What about when a business grows and requires more employees. The business will develop new close corporations and companies in order to ensure that each legal employer has less than 10 employees. A business could also opt to invest in new machinery and shift to more capital-intensive production processes in order to avoid crossing the 10-employee threshold, thus defeating the goal of job creation.

It is all very well to exclude businesses formed by the division or dissolution of an existing business, but it is very difficult to prove this in practice. It will be up to workers to challenge the reductions of their conditions of employment and prove that their employment is not subject to this Ministerial Determination. This will not only be difficult to prove, but will also be costly. It would have been preferable to make employers apply for this exemption, as is the case with all bargaining council’s that establish minimum conditions of employment and allow for exemptions.

The relaxations and the application of the Determination will have a negative effect on job creation. Enterprises will be reluctant to step over the 10-employee threshold. It will encourage employers to develop capital-intensive operations and introduce new machinery rather than employ more workers. The application of the Determination thus sets up a disincentive to employment creation in small businesses. This is the very opposite of what policy should be trying to promote in the context of the current employment crisis.

Although it is correct to exclude enterprises that are covered by bargaining council agreements, the downward variation will have the effect of increasing the employers’ clamour to limit the scope of and collapse bargaining councils. The Determination effectively sets up a disincentive for participation in bargaining councils, which contradicts the architecture of the Department’s Five Year Programme.

COSATU also notes that the ECC had rejected across the board exemption and proposed that only the following five categories be exempted: general dealers, transport employers, service stations, or security services where any of these employ 10 or less workers, and catering companies employing 5 or less workers. As discussed above, COSATU would still have been concerned about a determination restricted to such sectors, but at least such an approach is more nuanced than an across-the-board exemption of micro businesses.

No finite timeframe for the application of the Determination is provided for. If the basis for the Determination is the problems which micro enterprises will apparently face in meeting the provisions of the BCEA, this should be treated as a challenge to be overcome over time rather than as a permanent and insurmountable obstacle which must be circumvented through a Determination. It is illogical to exempt or allow more flexibility for certain sections of the targets of particular legislation purely because they are further away from the goals of the legislation to start with. Such rationale could set an unfortunate precedent both for future labour market and other areas of legislation.

We would have better understood a phased approach aimed at giving micro businesses more time to adjust to the provisions of the BCEA with the required institutional support. Instead, the Determination facilitates and entrenches lower employment conditions within this "sector".

4. Overtime provisions of the Determination
The Determination raises the number of overtime hours that an employee may work in a week from 10 to 15 hours, and reduces the rate of payment for overtime work from "time and a half" to "time and a third" (for the first 10 hours of overtime worked). The latter change takes the situation back to the rate before the introduction of the BCEA. We also note that this proposal was rejected by the ECC.

COSATU is opposed to this change. Firstly, it is a fallacy that workers in small businesses are required to work longer hours due to the nature of such businesses. The following table, drawn from the Green Paper on Employment Standards, indicates a clear inverse relation between enterprise size and hours worked. It is evident that workers in small and micro enterprises currently have the lowest regular as well as overtime hours.

It should be noted that this data is prior to the BCEA. It is clear that small and micro enterprises, as a rule, do not require particularly long hours relative to other sizes of enterprise. The rationale for the downward variation on hours in the Determination is thus unclear. It may well have the effect of encouraging the increasing of working hours amongst small businesses, against the entire thrust of the labour market reform programme.

COSATU is also concerned about the negative effects of the overtime provisions of the Determination for employment creation. As we argued in our submission on the Basic Conditions of Employment Bill, the reduction of working hours combined with a curb on overtime can assist in increasing employment levels if there is a commitment by employers to invest in employment creation. We noted that this would be preferable to a situation where the law allows or even pushes the economy onto a path where fewer workers work longer hours, for less.

Small, medium and micro enterprises have been touted as the engines of job creation. The overtime provisions in the Determination may have the reverse effect. Micro enterprises will be encouraged to make do with fewer workers and stretch them over longer hours.

5. Averaging of hours provisions of the Determination
The Determination provides that averaging of working hours may be permitted by written individual agreement instead of by collective agreement, as the BCEA provides.
Furthermore, under the Determination the average weekly overtime over the agreed period is doubled from 5 hours (in the BCEA) to 10 hours (under the Determination).

Many of the concerns raised in section 4 above also apply to the averaging of hours provisions. Furthermore, COSATU is extremely concerned about the shift from collective to individual agreement. This undermines the architecture of our labour legislation. It would also erode the collective ethos which we have been striving for. Providing for an individual employer-employee agreement also does not take account of the power relations which still pervade many of our workplaces. In reality, individual workers – particularly the most vulnerable workers who tend to be black, female, and unskilled - are in little position to contest provisions which are forced upon them by employers. Even the requirement for a written agreement is meaningless in the context of "baasskap" employment relations. This is one of the reasons why we have been opposed to downward variation in this and other regards. COSATU is opposed to the averaging of hours provisions in the Determination.

6. Family responsibility leave provisions of the Determination
The BCEA makes provision for three days family responsibility leave (for employees who have been in employment with an employer for longer than four months and who work for at least four days a week for that employer). This leave is provided for very specific circumstances – when an employee’s child is born or is sick, or in the event of the death of an immediate family member. Under the BCEA, only a collective agreement may vary the number of days and the circumstances under which leave is to be granted.

The Determination provides for an employer and employee to conclude a written agreement to include employees entitlement of family responsibility leave within their 21 annual leave days – effectively allowing for the scrapping of family responsibility leave. This gives a blanket right to companies to pressurise employees to agree to the complete loss of family responsibility leave.

COSATU notes that this goes further than the recommendation from the ECC, which rejected the inclusion of three days family responsibility leave within the 21 days annual leave and instead proposed the reduction of family responsibility leave to two days.
The Ntsika report specifically concluded that there were already extremely high rates of
compliance with family responsibility leave amongst small, medium and micro enterprises, including amongst those enterprises deemed to be "emerging".

South African workers have long been deprived of the rights to look after their sick children and to bury their dead. Some workers will now be deprived of these rights, simply by virtue of working in micro enterprises.