Chris Kotze
According to SBP’s latest SMME Growth Index, small, medium and micro-sized enterprises (SMMEs) in South Africa are not showing the same levels of job creation as their counterparts internationally. Global trends indicate that SMMEs are usually the largest employers in developed or developing countries, whereas South Africa saw numbers decrease from 22% of total employment in 2013 to 18% in 2014 with a marginal rise to 21% in 2015.
“The key problem that a lot of SMMEs have is lack of skills, so when you are looking to employ people the critical challenge is the workforce,” says SBP chief executive Chris Darroll. “Each sector is facing its own issues when it comes to employment and finding the right employee. The ICT sector is battling with skills and for the manufacturing sector it’s the cost of labour and the impact of wage agreements. Often SMMEs in manufacturing are not part of these agreements and are expected to adhere to the numbers and terms set out by big business.”
The index found that SMMEs are experiencing significant issues around trading and economic conditions, which are having a knock-on effect when it comes to employment and growth. SMMEs should be one of the most important sources of employment in the country — a fact highlighted by the National Development Plan — but the reality is not bursting with positivity. The unemployment statistics stand at 8.7 million adults and SMMEs are battling to take on new staff due to costs, legislation and a stagnant economy.
“The material Labour Laws (LRA and BCEA) are not conducive to creating an entrepreneurial environment,” says Chris Kotze, senior manager, Human Capital Labour Solutions. “The market is tightly regulated, with a high level of red tape and bureaucracy. For example, the provisions for terminating employment are very procedural and cumbersome, often resulting in days lost at the CCMA to resolve disputes, at either the direct or indirect cost to the SMME.”
The basic conditions of employment also help to create an expensive environment that may not be sustainable for the SMME. The difficulties include issues around minimum pay, family responsibility leave, maternity leave, sick leave, overtime, shift and night pay … and the list goes on. These put significant pressure on the small firm as they often don’t have human resources (HR) or internal legal experts, and the cost implications of compliance can be prohibitive.
“Often HR is the last thing a small business pays attention to,” says Nicola Neal, Head of SMME Development at Riversands Incubation Hub. “They don’t focus enough on building their talent and tend to employ workers on an ad hoc basis. While this is largely due to financial constraints, it affects employee retention. Many SMMEs neglect the important paperwork and compliance involved in employing staff and find it hard to stay abreast of labour laws.”
Complaints can cost the company in money and time, particularly if a complaint is taken to the CCMA. Depending on the extent of the violation or the issues that impact it, the price tag on the case can be prohibitive. In the 2014-2015 Global Competitiveness Report by the World Economic Forum South Africa dropped from 50th in the 2010-2011 report to 56th place. One of the key factors impacting this result was Labour Market Efficiency, with a score of 2.5 and a ranking of 144th place.
“One of the top-listed issues of the survey was unanimously restrictive labour regulations, ranking higher than corruption, inefficient bureaucracy and an inadequately educated workforce,” says Petra Rees, managing director of Lean Enterprise Acceleration Programmes, a subsidiary of the PLP Group. “Along with co-operation in labour-employer relations, the South African business fared poorly when it came to hiring and firing practices and the flexibility of wage determination.”
The primary challenges facing SMMEs come down to knowledge, capacity and competence within the current labour and employment landscape, and they need to find ways of addressing these going forward.
“The main labour relations and wage acts that most SMEs need to keep abreast of are the Constitution Act 108 of 1996, the Skills Development Act 97 1998 and the Basic Conditions of Employment Act 75 of 1997,” says Godfrey Madanhire, owner of Dreamworld Promotions. “Deal with these problems by sticking to procedure.”
SMMEs need to stay on top of how these rigid laws will impact their business while simultaneously remaining agile and capable. It is not a situation easily navigated — and there are further threats to SMME success.
“The small firm finds it hard to compete with big businesses that can offer benefits like bonuses, salaries and brand identity,” says Neal. “It makes it difficult for them to attract staff of a certain calibre. However, the SMME can take advantage of the fact that it is hard to move up the corporate ladder and they can offer their employees greater opportunities to grow.”
Small businesses can use their size to their advantage when it comes to training and development. They can improve employees’ skill sets in a variety of environments and they can personalise career pathways more effectively. Done well, this can attract a certain quality of candidate who usually would have turned to the well-established brand, and it allows the SMME to compete more dynamically on an uneven playing field.
“Assist employees through short courses or workshops,” says Madanhire. “When new staff members are invested in, it not only increases their capabilities, it helps motivate them in their work.”
Alongside the legislative issues and the challenges the SME faces in capturing the attention of skilled employees, there is the problem of coping with unskilled labour. There is a serious skills shortage in South Africa and while the government has taken steps to address this issue, the road ahead is still bumpy.
“Recent steps to rectify the skills shortage have been met with opposition from organised labour or political parties,” says Barristers at Law director AJ Smith. “The lack of skills, coupled with some of the highest entry level wages in, specifically, manufacturing sectors, mean that SMMEs have to pay very high entry level wages for unskilled staff. This results in a situation of high cost versus low yield and it has made us uncompetitive in relation to other markets. It also makes the economy very unattractive to foreign investment and difficult for SMMEs to compete with established companies.”
Of course, this takes the problem full circle, back to the results put forward by the SMME Growth Index and the fact that the SMME is not in a position to transform employment statistics, no matter how desperately the people and economy may need it. However, there are some steps that can be taken to put the small business back in control.
“SMMEs can overcome labour and employment challenges by seeking proper advice and being informed about the labour industry,” says Imraan Mahomed, partner and head of employment, Hogan Lovells South Africa. “Serious issues which impact SMMEs occur at sectorial level and SMMEs need to properly understand how the regulated employment law industry impacts them. Sectors are regulated differently and it is essential that the small firm seek the advice of a qualified profession to better understand the specific regulations that could impact their business.”
And, from the perspective of Smith, there needs to be a shift in the law so it distinguishes between the big, small and medium enterprise, allowing for greater flexibility to react to changing market conditions and to ensure that businesses can remain dynamic during periods of flux.
“Reducing the amount of regulation will allow the business to be market driven,” he concludes. “While labour laws are there to protect employees from exploitation by employers, they must allow a free market system to thrive.”