By Rob Cooper, Tax Expert and director of Legislation at Sage

We’ll be watching Finance Minister, Pravin Gordhan, closely this week in the run up to presenting his Budget for the 2017/8 tax year, on Wednesday, 22 February. One of the issues we hope the Minister will provide clarity on in his statement is the implementation of the National Minimum Wage.

Deputy President Cyril Ramaphosa signed a National Minimum Wage Agreement into existence on 8 February this year - the culmination of years of debate between labour, business, government and economists.

The arguments about whether a National Minimum Wage Agreement will close the wage gap and stimulate the economy or rather lead to job losses can be set aside. We should now focus on what needs to be done to ensure that it is a success for workers and businesses alike.

With implementation set to begin in May 2018, government is proceeding with caution. Many details in the agreement still needs to be fleshed out as government creates draft legislation for the National Economic Development and Labour Council (Nedlac) discussions and public comment before promulgating an Act.

Minimum Wage Value

The success of the National Minimum Wage will depend on setting the minimum wage at a high enough level to close the wage gap, yet not so high that businesses can’t afford it or decide to automate rather than hire. Government has taken a cautious stance, setting the initial National Minimum Wage at R20 per hour.

This is a practical approach, aimed at limiting the potential economic damage of an unrealistically high minimum. It was not the intention (and it is not financially possible) to pay a minimum wage at the level of a ‘living wage’. The National Minimum Wage is not meant to be a wage that an individual can live on – it is designed to move people out of poverty and gradually close the ‘wage gap’.

Specifying hourly rates as the base value is a pragmatic decision.  It is the only realistic way in which to monitor compliance since different industries have different ordinary hours of work and since working months vary between four and five weeks.

Minimum Working Hours

Parties to National Minimum Wage Agreement all accept that it should not be possible for employers to drastically reduce working hours to reduce the total wage cost.  There appears to be general agreement that a minimum number of ordinary hours of work must be set, though labour and business differ about the minimum working hours. 

The panel favours a minimum of four hours per day; Cosatu wants a minimum of six hours which amounts to a minimum wage of R120 per day.  A morning-only job is five hours per day, so perhaps this could be a practical number to compromise on.

‘Casualisation’ is another matter for discussion.  To prevent permanent labour being replaced by casuals, premium rates of pay i.e. more than R20 per hour, and minimum working hours per day are on the table.

Increases to the National Minimum Wage

Labour would like the National Minimum Wage to be increased substantially every year to overcome what it perceives to be a very low starting value, while business will argue for more moderate increases.   The plan is to set a medium-term target, and then work progressively towards that.

Introduction of the National Minimum Wage

When the National Minimum Wage is implemented from May 2018, businesses that are unable to afford the minimum wage will be able to apply for an exemption of up to 12 months. Farmworkers will phase in at 90% of the National Minimum Wage, and domestic workers at 75%.

All current wage regulating measures will have to be changed to bring their levels, if lower, up to the National Minimum Wage level by May 2018.  The National Minimum Wage will set the rock-bottom wage value across the length and breadth of the country, and across all industry sectors.

Employment Tax Incentive

To qualify for The Employment Tax Incentive (ETI), an employee must pass a minimum wage test, which involves comparing the employee’s wage paid to that of the sector’s wage regulating measure. If there is no wage regulating measure, the monthly wage paid must be at least R2 000, with no option for a weekly or hourly minimum. The ETI legislation will need to be amended to be based on the National Minimum Wage’s hourly rate.

National Minimum Wage and Child Support Grants

The monthly national minimum wage of R3 500 (based on a 40-hour week) equates to an annual income of R42 000, which is the current maximum income ceiling for parents to qualify for child support grants. If worker’s wages were today increased to the R3 500 monthly minimum, those who are parents would no longer qualify to receive child support grants. One assumes that this will be addressed by the relevant authorities.

Is the agreement going to assist Workers?

At 2016 values, over six million workers would benefit from being paid at R20 per hour. Even though the R20 will be eroded by inflation by May 2018 and even though it is being phased in for farm and domestic workers, approximately 4 million workers will still benefit from the National Minimum Wage when it is implemented. 

We are coming off a base of high levels of unemployment (27.1% of the workforce), and according to recent surveys, we have the worst wage inequality in the world. To estimate the countrywide cost of introducing the National Minimum Wage, assume an average wage of R1 per hour per worker for four million workers for a 160-hour month and do the sums.

The principle is that in the process of employers paying an extra wage of R640 million every month to help uplift four million workers, that the R640 million will circulate back into and stimulate the economy.

Follow @SageGroupZA on 22 Feb for LIVE expert insights from the annual Budget Speech. #Budget2017

Cooper will be conducting the 2017 Annual Payroll Tax Seminars in different cities around South Africa, where he will discuss the 2017 Budget proposals.