The new minimum wage – juggling a fair wage versus business decline. Is there a solution?

In 2010, Pravin Gordhan stated that the South African economy would need to grow by 7% per annum for years to come to create jobs and reduce poverty. Despite the intention of the introduction of a new national minimum wage (NMW) to bridge the wage inequality gap, and improve overall living wage for entry-level, unskilled and semi-skilled workers, the impact of hiked salaries on company bottom lines may very well disrupt Pravin’s goal.

Businesses have been given a deadline of 1 May 2018 (Worker’s Day) to comply with the NMW or face penalties. However, businesses may not be able to afford the wage hike and might well be forced to retrench staff. An analyses of the effect on the South African economy with the introduction of a NMW supports this theory, predicting implausibly large losses in jobs and in economic growth – even at a lower national minimum wage than the bill just passed.

In order to strike the balance between carrying the financial impact of the NMW and minimising job losses, organisations need to ensure they are prepared. Understanding the impact of the NMW, and the solutions available to mitigate it, can enable businesses to manage this process and strike that balance.

Jumping the wage gap

According to Joanette Nagel, Head of Commercial & Labour at Hunts Attorneys, there has not been a standardised minimum wage in South Africa, to date. “Previously, the minimum wage was determined according to industry and regions, with rural areas receiving a lower base than urban areas. The NMW has been standardised at R20 per hour for all industries across the entire country, barring exempted industries of farm and domestic workers, workers employed by the expanded public works program and learnerships.” says Nagel.

For many workers, this will mean a considerable jump in their salary, while others may see only a small rise. Nagel adds that, for some industries, the new wage standard could effectively double the salaries of entry level workers – both a huge boon to employees and a large additional cost to employers.

Says Sean Momberg, MD at Workforce Staffing, “One of the concerns amongst employers is the impact this will have on maintaining morale and fairness among workers. For example, an employee who started earning the minimum wage a couple of years ago, and is now at the new base wage, is likely to feel demotivated and slighted by a newer employee earning the same amount by default. This could cause internal feuding and even lead to protests.”

According to Momberg, those organisations that face these scenarios will need to manage salary allocations carefully, practically and diplomatically, to avoid unhappy and disgruntled staff. Where possible, these organisations may need to consider providing longer standing staff with some sort of compensation to maintain equilibrium. Unfortunately, this is not often possible.

The cost to business

Perhaps the biggest challenge is the impact on affordability. Organisations that have a large portion of their workforce on minimum wage may be unable to bear the cost of this increase, let alone adjusting the salaries of higher paid employees. There are already sparks of outrage in the farming community and the risk of retrenching and cutting down on staff to carry the added costs is very real, in light of this.

“Research estimates that there may be between 600 000 to 800 000 job losses country-wide, due to businesses who can no longer afford to employ their staff at the new wage. This doesn’t bode well for our current unemployment figures,” says Nagel.

“However,” adds Momberg, “there is light at the end of the tunnel, for both employers and those who find themselves unemployed.”

Solutions are available

Nagel says that employers who find themselves unable to carry the costs of the new wage hike may apply for exemption for a period of a year, with citable reason. These organisations must be able to justify what they are able to afford and may still be subject to any limitations or restrictions imposed by law or the exemption regulations.

The potential concern with applying for exemptions, however, is that by the time a year is up, they may find themselves needing to re-apply as the minimum wage is set to increase on an annual basis.

“It becomes a vicious circle,” says Nagel. “The organisations will need the assistance of labour specialists to help them outline realistic wage and employment goals and come up with a strategy to achieve them.”

Momberg says that staffing solutions for businesses could be the silver bullet to address labour concerns, wage problems and the potential for strike action.

Enlisting the aid of an outsource staffing partner can help alleviate the pressures felt by the new minimum wage in a number of ways. Organisations can save costs by downsizing or reducing strain on their human resources department by entrusting the function to an outsource partner.

Total staffing solutions

“Outsource staffing partners are experts in labour solutions. We understand the laws and ensure that we fully understand both employer and employee requirements. Organisations can rely on their staffing partner to manage wages, performance, staff wellbeing, job satisfaction, training and virtually every function usually undertaken by HR,” advises Momberg. “Staffing partners also have access to a range of skilled individuals and are able to ensure the right people are placed in the right positions. This drives down staff turnover and maintains productivity.”

Organisations will be feeling the pinch of the wage hike and will need to look at other areas where they can shave costs. One of these areas is reducing overtime and managing shifts better.

“Often, a large part of wage budgets is eaten up by overtime,” says Momberg. “Staffing partners are able to assist with providing staff to cover those gaps where using permanent staff doesn’t make financial sense.”

Managing any resistance to the new wage hike can also be a problem for organisations. Nagel says that there are legal routes that can be taken, however, and that organisations who leverage the services of a staffing partner could avoid these pitfalls altogether.

“Retaining staff while maintaining wage budgets are going to be a challenge over the next few years. Staffing partners exist to help organisations through these challenges, whether in an advisory, supplier or total outsource capacity,” concludes Momberg.