A labour broker subsidy?

2014-07-27 15:01

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Labour brokers are absorbing the employment tax incentive that is meant for employers. Dewald van Rensburg examines the trend

Labour brokers are absorbing the controversial employment tax incentive (ETI) to boost their profits – without actually subsidising wages in the labour market.

If large providers of contract labour are

absorbing the incentive, that means the lower cost of employment is not making its way to their clients.

Since it is the clients who are supposed to be stimulated into hiring more people for less money, this potentially undermines the scheme, turning it into free money for labour intermediaries.

The major JSE-listed labour broker and recruitment agency, Adcorp, said there was nothing dodgy about it.

The company released its annual report this month, which covers the first two months of the ETI – January and February. In these two months alone, Adcorp had already made R7?million from the scheme, which it accounted for as part of “other income”.

Crudely annualised, that comes to R42?million a year for Adcorp alone, accepting that its use of the ETI will not increase over time. That amounts to a 14% boost to the group’s operating profit, based on its latest results.

“We do acknowledge that in order to encourage employment?...?clients would seek to benefit somewhat by the ETI,” the company said in response to questions.

“Adcorp does anticipate certain clients may request a certain portion of the ETI to be passed on to them.

“Clients may request a certain ‘participation factor’ to be applied but each case shall be dealt with on a case-by-case basis.”

According to the company, this “doesn’t nullify the incentive” because it is Adcorp that hires the employees, who are then “deployed on client sites”.

“Yes, it is the client that demands labour but it is Adcorp that supplies labour. The ETI is applicable where the

employer-employee relationship resides.

“Adcorp and any other company merely uses the ETI only to the extent that the prescribed criteria are met.”

And National Treasury agrees. “If a labour intermediary is paying the salary, they are eligible to claim the incentive,” it told City Press in an emailed response to questions.

“We believe that even in an environment where intermediaries are present, the incentive will still be effective in stimulating labour demand,” it said, without explaining why.

“Questions on the sharing of the benefits of the ETI are matters relating to the relationship between the intermediary and its clients, as well as the agreement that regulates that relationship,” the Treasury said.

Large labour brokers, officially called temporary employment services, are ideally placed to benefit from the ETI, formerly known as the youth wage subsidy.

It targets newly hired workers aged between 18 and 29 earning less than R6?000 a month – a good description of the bulk of the country’s large outsourced workforce.

According to Adcorp, roughly half of its 91?000 temps fall into that demographic.

Workforce Holdings, another listed labour broker with 25?500 contractors, has also told shareholders the ETI will be a boon. “We anticipate that, by the nature of our business, where we introduce previously disadvantaged unemployed people into the market, we will be beneficiaries of the [ETI],” it said in its annual report earlier this year.

The company’s financial director, Willie van Wyk, declined to comment on the extent to which they are using the ETI – or passing on the benefits to clients.

“We are unfortunately trading in a closed period and then typically err on the side of safety when divulging any financial information on the company,” he said in an emailed response to questions.

Kelly Group financial director Lionel Wilson did not reply to emails or phone calls over more than a week.

The Treasury’s R1?billion budget for the ETI “will be consumed very quickly”, said Adcorp spokesperson Mandy Jones.

According to her, there is no plan to purposefully exploit or commercialise the ETI, but the incentive probably isn’t sustainable considering the large demand.

“It’s new and it’s in a trial phase, so we will see,” she said.

The Treasury estimated that about 240?000 workers would benefit from the R1?billion allocated to the incentive scheme this year. Its spokesperson, Phumza Macanda, said 11?000 companies had already claimed the incentive by the end of May.

Their claims relate to “about 133?000” employees, giving the average participating employer 12 subsidised workers. The most conservative possible estimate of Adcorp’s use of the ETI by the end of February is 3?500 subsidised employees.

That assumes its R7?million subsidy for January and February comprised the maximum R1?000 subsidy for each worker involved and that zero benefits were passed on to clients.

Patching up problems

The Treasury is already patching up a few other problems that have emerged with the ETI as part of its annual Taxation Laws Amendment Bill.

One loophole it has identified is that employers might manipulate the timing of salaries to make employees look as though they qualify (earn less than R6?000) when they are actually earning more.

Now it is monitoring ETI-claiming companies for signs that their annual wage bill does not square with its monthly ones, it said.

The original design of the ETI also made no distinction between workers with different working hours per month.

Someone working 80 hours a month for R2?000 gets the same subsidy as one working 160 hours for the same amount, despite being in a higher earning category.

Now the incentive will effectively work on an hourly wage basis.

It will cover people who earn between R12.50 and R37.50 an hour, the Treasury said in the explanatory memorandum to last week’s bill. The bill is open for comments from the public.

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