Exemption clause threatens success of minimum wage

The new national minimum wage of R20 an hour came into effect on January 1, and though it’s too early to tell how well the exemption process is working, there are already allegations of bad faith from business.

The key benefit of the minimum wage is that it raises the pay of the working poor about 6-million people who don’t earn enough to escape from poverty. In the process it should also promote labour stability and raise worker productivity. The concern, however, is that it could wipe out the last remaining pockets of low-skilled, labour-intensive work in the country.

Because of the risk to employment, the flexibility afforded by an efficient exemption process is critical. All along, business’s understanding of the National Minimum Wage Act was that firms that could not afford to pay R20 an hour would be fully exempt subject to an independent, objective analysis of their finances.

However, in the middle of 2018 the government inserted a threshold clause into the national minimum wage regulations limiting the extent of the exemption to 10% of the minimum wage. Exempt firms would still have to pay workers R18 an hour, a saving of just R2 an hour.

But how likely is it that a firm that is unsustainable paying R20 an hour will be able to afford to pay workers R18 an hour?

On December 7 2018 Business Unity SA met labour minister Mildred Oliphant and urged her to reconsider this clause, following assurances from senior departmental officials that the clause was an oversight and would be removed. Oliphant promised to reconsider, so Business Unity SA was shocked to find the clause had been retained in the final regulations gazetted two weeks later.

The fear is the 10% threshold will dissuade marginal firms from bothering to apply for an exemption and result in widespread noncompliance, destroying the credibility and effectiveness of the national minimum wage system.

This was largely the problem with SA’s previous sectoral minimum wage system. According to official figures, more than 80% of registered, nonmetro KwaZulu-Natal clothing firms were ignoring the sectoral minimum wage two years ago when it was R20 an hour and this was after a lengthy compliance campaign had been waged against these firms. The compliance drive was an abject failure. Not only were hundreds of small firms forced to close, costing thousands of workers their jobs, but a year or two later, when only the rump of the industry remained, noncompliance was back up at its previous level.

The lesson is that you can’t rely on enforcement to make a national minimum wage system work. Even if SA had big enough enforcement machinery, the goal is not to close firms and cause widespread job losses. But nor is there any value in a system that relies on mass exemptions. The better option is to set the national minimum wage at a level that invites maximum buy-in from business so it enjoys widespread voluntary compliance.

Viewed this way, the government’s insertion of a 10% threshold clause at the last minute could end up being a costly miscalculation. President It’s worth Cyril remembering’that Ramaphosa s the concerns of those on national minimum wage advisory panel who feared that R20 an hour was too high and would lead to too many job losses, were assuaged by the panel insisting on generous transitional arrangements and an exemption system.

Among other things, the panel wanted all small businesses to be exempt for the first year. However, these recommendations were tightened up by labour and government negotiators. The start date was moved forward; the reprieve for small firms was denied; and, ultimately, full exemption was limited to a 10% discount.

It would be a crying shame if the entire edifice now runs aground on widespread noncompliance that sets business and labour back at each other’s throats.

If it does, SA will have squandered a unique opportunity to prove that the social partners can work together to reduce inequality. If they do manage to pull it off, against the odds, it will count as a major victory for Ramaphosa.