Little shop of horrors
A small business, employing local people and paying well in excess of the minimum wage, was forced to retrench all its staff — due to onerous conditions imposed by a sectoral bargaining council
For 15 years, craftsman Stuart Douglas has been making high-end wooden cabinetry and furniture from his farm studio high up in the Franschhoek valley.
His small business, Douglas Built, hadn’t turned a profit for three years, but the environment was calm and collegial, and allowed Douglas to follow his passion of working with wood. He also employed eight workers from Groendal, the local township, paying them well in excess of the minimum wage — or, he did until late last year, when the Western Cape Furniture Bargaining Council entered the picture.
What followed was a 10-week "nightmare" of bureaucratic intervention that fractured the trust he had spent years building with his workforce. Coming on top of a financially difficult year, it culminated just before Christmas in Douglas retrenching everyone.
He now works alone, outsourcing and subcontracting as required for bigger jobs. Three of his former workers are sitting at home, living off their unemployment insurance. He has helped another two start their own small upholstery business, and his most skilled craftsman has found a new job at a competitor in Paarl.
It’s a cautionary tale in an economy that creates more unemployment than employment. Over the course of 2019, SA destroyed 108,000 jobs, according to Stats SA’s fourth-quarter Labour Force Survey.
Douglas may be responsible for only a tiny handful of those, but his story is being repeated in every industry where there is a bargaining council, says labour lawyer and DA labour spokesperson Michael Bagraim.
"I see at least five to 10 of these cases a week," he says. "The system is ridiculous. We are trying to stifle small businesses when we desperately need them. The bargaining councils are encouraging them to disappear."
In SA, bargaining councils bring together representative trade unions and employers’ organisations to reach collective agreements on wages and benefits that are typically extended to everyone in a sector, even those not party to the agreement.
The system is ridiculous. We are trying to stifle small businesses when we desperately need them. The bargaining councils are encouraging them to disappearMichael Bagraim
Employers’ organisations are deemed "sufficiently representative" if their workforces together represent more than half the workers within a sector. As a result a few large firms tend to dominate these councils even if they are dwarfed by the number of small firms.
Agreements struck in bargaining councils between big business and big unions are then extended to small firms in the same sector. It’s a practice economists and small business organisations have for years been urging the government to halt, because the small businesses simply cannot afford them.
This cry was taken up by finance minister Tito Mboweni last August. His growth document, "Towards an Economic Strategy for SA", warned that "rigidities in labour market institutions and regulations raise costs for small, medium and micro businesses (SMMEs)" and that this can "inhibit their sustainability and contribute to rising youth unemployment".
The document boldly recommended that SMMEs be given full or partial exemption from various regulations, including the extension of collective bargaining agreements. It also urged the government to revive the Red Tape Impact Assessment Bill, which proposes that all new and existing legislation be reviewed with the aim of slashing red tape by 25% over the next five years.
According to the Small Business Project, SMMEs spend 4% of annual turnover on red tape, and the smallest firms are the worst affected.
However, Mboweni’s document was greeted with howls of outrage from the labour movement — and the mooted labour market reforms were kicked into the policy graveyard of the National Economic Development & Labour Council (Nedlac).
Mboweni recently lamented on Twitter that SA fails to make evidence-based policy or listen to technical experts. In fact, SA has become so antiquated that it is one of the only countries that still conducts and extends collective bargaining agreements at a sectoral level.
Bargaining councils are rooted in the multi-employer bargaining system that prevailed in Europe and the UK in the early part of the 20th century. The concept influenced early labour legislation in several Commonwealth countries, including SA.
Since the 1970s, however, developed nations have systematically rolled back the gains made by organised labour in response to globalisation and competition from industrialising economies.
The rigidity inherent in the one-size-fits-all bargaining council model was one of the main casualties of this process. The upshot was a shift towards individual workplace bargaining, where the trade-off between higher wages/benefits and job security is more apparent — except in SA, where sectoral bargaining is encouraged by the Labour Relations Act.
In 2010, Jeremy R Magruder, an economist at the University of California, Berkeley, showed that in SA, employment per industry decreased by 8%-13% due to bargaining council agreements, with the loss in jobs largely concentrated in small firms.
These findings have been confirmed by economist Wayde Flowerday in his Stellenbosch University doctoral thesis, which is about to be published.
By matching bargaining council data from SA’s clothing, metals and engineering, and textile sectors with national employment and earnings data, Flowerday was able to estimate that the introduction of new bargaining council agreements is associated with an average drop in employment of about 8% across these sectors.
"In SA we have seen that these agreements achieve their goals of raising the wage paid to workers, but with every new agreement issued, it seems to decrease employment," he says.
In Douglas’s case, his difficulty didn’t centre on wages, but on the extent of benefits and the burden of administrative compliance imposed by compulsory council membership.
Perversely, Douglas’s high wage structure was a disadvantage, because the various levies and deductions demanded by the council, including 12% towards a provident fund and up to 15% for a holiday and bonus fund, are calculated as a percentage of payroll. The bigger the payroll, the bigger the amount the employer must cough up.
Meeting council requirements would have added a further R17,000 to his total monthly labour cost of roughly R83,000 — an increase equivalent to the salaries of three staff members.
Theoretically, the workers should pitch in with 6% of the provident fund contribution by way of a salary sacrifice, but Douglas’s workforce balked. Not only were they cash-poor and unused to saving; they didn’t trust that the council’s provident fund would stay solvent. (No private fund was interested in taking on a workforce so small.)
Very quickly, a personal, close-knit workplace based on openness and trust became riven with suspicion and resentment.
"The same estrangement and alienation that the council introduced only ever manifested previously when we had to retrench three people five years ago," says Douglas. "For an artist, this is just not an option."
Not only was membership of the council going to impose a huge financial cost on the business — for almost zero perceived benefit — but the administrative burden would be equally onerous.
The final straw for Douglas was the council’s inability to clearly explain the holiday and bonus fund deductions. They were purely attendance-driven, rather than based on performance, and to him seemed little different to 13th and 14th cheques.
"This is when the wheels really came off," says Douglas, who has a doctorate in anthropology. "It’s a mess of attendance scheduling and reward for working 40 hours per week, and sacrifice or punishment for not."
The council suggested he shell out R15,000 on an automated clock-in system to keep track of every worker’s hours. But even then, he realised, he would have to hire an administrative assistant to fill in the weekly forms the council required, including a precise log of when each worker arrived and departed, and how long each took over their lunch breaks.
This was completely at odds with the realities and ethos of running his business. It was normal for his workers to be 10 or more minutes late for work, and to leave early, because they used their vehicles as saloon taxis to ferry other workers to and from work, supplementing their income.
After one too many sleepless nights, Douglas decided the only rational option was to retrench his workforce. Only once the council heard his decision did it tell him it was possible to apply for an exemption. Not wanting to prolong the agony, he declined.
Bagraim, too, sniffs at this option. He says it’s beyond the capabilities of most SMEs, especially township ones, to put the paperwork together to apply for an exemption without the help of an accountant. Even then, an exemption is hard to get, or only partial, which just delays the pain.
"I tell clients to get creative, to duck and dive, because I can’t bear it. [Small firms] are taking in people without CVs, people who live nearby, the kind of people we need jobs for," he says. "Clients are saying all the time, [that] I can subcontract to someone else, or I can close the firm and import the things I was manufacturing. I don’t blame them."
And nor should anyone blame Douglas. He recently wrote to the Western Cape Red Tape Reduction Unit, saying: "I thought it wise to inform you of this ridiculous and sad situation in an environment in which small businesses are supposedly the way forward."
He has yet to get a response.
The Western Cape Furniture Bargaining Council did not respond to the FM’s request for comment.