Giraffe in association with Ganasen Botha Inc- labour law experts
South African labour laws have recently changed- specifically regarding the use of labour brokers. In this article we provide HR managers and recruiters with everything they need to know about the new law and its implications.
South African labour regulations are widely regarded as rigid and unfriendly to businesses, especially when compared with developed markets such as the US and Europe. In the US it is possible to hire and fire at will, making it easy for businesses to manage costs and adapt to changing environments. In South Africa by contrast, hiring permanent employees comes with considerable compliance and cost requirements, such as payment of UIF. Additionally, it is very difficult to dismiss a permanent employee as lengthy disciplinary procedures are required, and appeals for unfair dismissal are common. This makes hiring permanent employees complex and costly for many companies, especially those with large workforces.
For many years there has been a legal loophole for businesses to circumvent these issues - the use of temporary employment service providers (TES), commonly known as labour brokers.
What are labour brokers and why are they used?
Labour brokers provide staff to another company with the purpose of rendering services to, or performing work for, that company. In other words they supply labour for a fee. This is fairly common in the case of non-core functions, such as cleaning services or security services. Another frequent use case is that of seasonal demand, such as retailers’ use of temporary shop assistants over the Christmas period to cope with increased shopper activity.
However, many companies are using labour brokers not for seasonal or non-core functions, but for effectively permanent staff - specifically to circumvent labour regulations that increase the cost to company of compliance and protect permanent employees from unfair dismissals. Similarly, labour brokers have seen an opportunity to supply large scale labour to corporates who want to limit their risk and reduce costs. The intention of labour brokers is to employ permanent staff and have sufficient numbers of clients in an industry such that, should one client be dissatisfied with the employee’s work, the employee can be “bounced” to another client, minimising the risk of losing their job. In practice though, the employee’s employment is linked with their performance with the client and if the client becomes dissatisfied for any reason, then the employee can be lawfully terminated. This has the very real effect of stripping the employee of the protections provided by the current body of labour laws.
The Labour Relations Act (LRA) was previously amended to state that an employee of a labour broker working for a client company is deemed to be the employee of that company and employed on an indefinite basis by the company immediately after the expiry of a 3 month period. This effectively meant that even if a company used a labour broker for staff, those staff would be deemed permanent employees of the company after 3 months of working there. The interpretation of this amendment resulted in a dispute lasting several years which ended up in the Constitutional Court for determination. In July 2018, the Constitutional Court made a decision on this matter.
What do the new laws say about labour brokers?
The Labour Appeal Court (LAC) had ruled that the amendment to the LRA affecting the automatic change of the employee’s status from a temporary employee to a permanent employee, meant that the labour broker’s client was the sole employer responsible for compliance with the LRA regulations. The Judges felt that this interpretation of the amendments to the Act gave the best protection to the rights of placed employees. However this effectively defeated the purpose of using labour brokers, which is why they appealed the LAC decision.
The labour brokers appealed to the Constitutional Court asking the judges to reconsider the Labour Appeal Court’s Judgement. The Constitutional Court agreed with the LAC and judged that the Company providing the employment, is the only employer of that employee regardless of what the contract says and is responsible for any claims by the employee against the employer in terms of the LRA regulations. The effect being that an employee supplied by a labour broker to a company, as temporary employee is deemed to be a permanent employee of the company immediately after a 3 month period of employment. This provision applies only to employees earning under the stated threshold of R205 433.30 per year, because the clause is intended as a protection to low wage earners who are often desperate for work and do not have the required skills to negotiate contracts in their own interest.
In response to the Constitutional Court judgment, labour brokers are of the view that dual employment has not ceased in its entirety but has ceased only terms of the LRA and that the TES contract is still recognised in terms of other labour legislation such as the Basic Conditions of Employment Act (BCEA). There seems to be support for this in the judgment of the Constitutional Court, which also drew the distinction between being an employee of the employer only in terms of the LRA and not other employment legislation. This seems to give the labour brokers a lifeline for now, albeit a complicated one.
The Judgement still allows for the functionality of labour brokers for persons performing a truly temporary service as defined in the BCEA. In other instances, labour brokers can still provide services and shall still function as a consultant to the employer of the placed employee. Should the labour broker breach any of the provisions of the LRA, the company will be held liable for the breach as if it is the employer. The placed employee will have a right of recourse against the company in terms of applicable labour legislation and will be able to claim damages from the employer.
What does the new law mean for HR managers and recruiters?
The legislature’s intention is to remove temporary employment providers and to promote direct employment of employees and it is our view that this decision is merely one step in the journey towards that goal. Companies may therefore be advised to manage their human resources, recruitment and disciplinary processes internally in the long run.
Companies that use labour brokers might wish to consider a blended model where they appoint some staff permanently and gradually phase out the use of labour brokers as their business processes adapt to the new ways of working, specifically regarding recruitment, retention and management of human resources. For example, a company that relied exclusively on labour brokers might need to build its own high volume recruitment capability so that it can manage the transition from external suppliers to internal recruitment.
If companies wish to continue using labour brokers, they should be extremely cautious when appointing a labour broker service provider and must ensure that the labour broker has sufficient professional indemnity insurance cover, should they trigger a breach and must ensure that the labour broker gives the company a full unlimited indemnity against all labour related claims.
Finally, companies that wish to continue using labour brokers for effectively permanent staff should be mindful that, given the current legal trajectory, they may be at risk if there are future changes in the labour relations act.
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About Ganasen Botha
Ganasen Botha Incorporated (GBI) is a commercial law firm offering specialist advisory services to companies and visionary entrepreneurs. GBI ensures that companies can access our experienced team’s skills and industry contacts, by offering affordable fixed price legal packages, as well as bespoke services that are in line with the entrepreneurial spirit of constant innovation and quality. We care about our client’s sustainable growth.