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Labour brokers under threat

16th March 2009


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The practice of labour broking in South Africa is once again under the spotlight. This follows Namibia's recent decision to ban the practice and the apparent intention of the ANC to bring about the same in South Africa.

Namibia's new Labour Act criminalises the practice of 'labour hire' (a term used synonymously with the more colloquial 'labour broking'). The constitutionality of the banning provision was recently challenged in that country's High Court without success. Shortly after learning of the Namibian court's ruling, South African Minister of Labour Membathisi Mdladlana expressed his support for the prospect of banning labour broking after the general elections. The Minister's sentiments have been echoed by trade unions COSATU and FEDUSA, who have been equally outspoken against the practice. The union federations both urge the South African parliament to follow in its Namibian counterpart's footsteps.


But what would the consequences of such a step be?

Background to Labour Broking

With over 6000 recruitment centres nationwide, the labour broker sector has experienced rapid growth over the past fifteen years. With the total number of brokers tripling over the period of 1995 to 2002, the R 26 billion industry employs approximately 500 000 people per year. Factors contributing to the success of the industry are fourfold. Firstly, seasonal changes in product demand, staff absences, or a need for employees with scarce skills for a short period of time increases the demand for a flexible workforce. Secondly, labour broking is attractive from an economic-efficiency standpoint, as brokers have an incentive to train their workers to possess a pool of skills which are developed further by the multitude of tasks that they perform in the workplace. Thirdly, there is a perception that labour brokers are better suited than their clients to manage compliance with the administration surrounding employment and the costs involved, and the ability of the client to pass the risks associated with employment on to the broker. Lastly, the legislative climate is accommodating, as the Labour Relations Act (LRA) allows for the lawful operation of the industry.

The LRA and the Basic Conditions of Employment Act seek to strike the right balance between the demand for a flexible workforce and employees' rights. For example, in certain circumstances, as spelled out in the Acts, the labour broker and its client are to be held jointly and severally liable where the broker contravenes a provision of an Act regulating the employment relationship.

Nevertheless, the industry attracts its fair share of controversy. Under the LRA, a 'temporary employment service' (TES), or labour broker, is regarded as an employer for the purposes of the Act. As Jan Theron notes, 'it is difficult to see how TESs could have been designated as employers except through legislation'1. As such, various problems arise. For example, indeterminacy issues surrounding the point of hiring and the circumstances that need to be present in order for the 'employer' to dismiss an employee are created. Furthermore, as Theron illustrates, arbitrators deciding unfair dismissal cases before the CCMA have experienced conceptual difficulties with the application of the LRA to labour brokers2. However, these are but minor points of contention.

The hefty argument directed against the practice refers to the unequal bargaining power of the temporary employees and the allegedly exploitative nature of the practice of labour broking. It is argued that the temporary employees generally lack the resources or stability in the workplace to unionise. FEDUSA maintain that the constitutional right of the temporary employees to collective bargaining is being undermined. Furthermore, the union believes that the industry rarely meets its obligations with respect to employment benefits. For example, Theron describes what he refers to as a typical broker-employee agreement as containing a clause providing that termination at the end of the employment term shall not be construed as a retrenchment, thereby denying any entitlement at that stage to severance pay.3

CAPES - the Confederation of Associations in the Private Employment Sector - faces the onerous task of opposing the ban that the unions so ardently favour. However, on several issues, CAPES finds itself somewhat in agreement with the unions. John Botha, chairman of CAPES, acknowledges the existence of a handful of problematic labour brokers who disregard the law relating to employment. CAPES is pressing for an improvement in regulation, recognising a need to ensure that employment benefits and liabilities are both clearly defined and enforced. According to CAPES, the economic benefits of labour brokers are indisputable, and it is argued that, particularly in the current context of globalisation and the economic climate, the disbandment of the labour broker industry will have devastating effect on the nation's unemployment rate.

The Constitutional challenge in Namibia

As mentioned, Namibia's Labour Act, which came into operation on the 1st of November 2008, prohibits the practice of 'labour hire'. The provision pre-empts a potential infringement on the constitutional right to '...carry on any... trade or business', by saying that it is 'in the interest of decency and morality'.

Despite this inbuilt justification, labour broker African Personnel Services (who, incidentally, operates throughout Southern Africa) wasted no time in bringing a Constitutional challenge to the section. In a judgment delivered on the 1st of December 2008, the Namibian High Court dismissed the argument that APS's freedom of trade had been infringed, as a labour broker's contract of employment had 'no basis in law'. APS therefore failed to show that the right it claimed was a legal right.

In coming to this conclusion the court defined 'labour hire' as a splitting of what would otherwise be a contract of employment into a number of contracts for the provision of personal service between X (the employee) and Y (the labour broker) and between Y and Z (a client of Y for whom X renders his or her service). The court referred to the common law position and the general principles of a contract of employment, and concluded that there can be no contractual privity of a third-party labour broker to an employment contract. Quite simply, the tripartite employment relationship could not give rise to a lawful contract of employment.

Of significance was the court's remark that the practice of labour hire violates a 'fundamental principle' of the International Labour Organization (ILO), namely that 'labour is not a commodity' (Namibia ratified ILO Convention 138 and ILO Convention 182 on November 15, 2000). In addition, the court remarked that '[the practice of labour hiring] smacks of the hiring of a slave by his slave-master to another person under location conduction rei in Roman Law'.

One could argue that the judgment's invocation of the 'fundamental principle' of the ILO that 'labour is not a commodity' in its reasoning that the practice is 'unknown, nay, offensive of, our law of contract of employment...' is flawed. The court appears to have been unaware of the ILO Convention 181 of 1997 on Private Employment Agencies. In this Convention the ILO recognises the legitimacy of the labour broker industry and aims to provide for its effective regulation. Therefore, the court's reliance on its international obligation under the ILO to conclude that labour broking has 'no basis' in Namibian law appears to be misplaced.

Looking ahead - the possibility of a ban in South Africa

Should South Africa pursue the Namibian path in banning labour broking, it is perhaps likely that it too will face a Constitutional challenge.

Would the chances of success differ in the South African context? The following arguments could arise under the circumstances:

The hypothetical labour broker seeking to bring an action for infringement of the right to freedom of trade faces an initial hurdle. Unlike the Interim Constitution, which guaranteed the right to 'every person', the final Constitution affords only 'citizens' the right to choose their trade freely. The availability of the right to a juristic person may thus turn on an interpretation of the term 'citizen'. If the court looked to the South African Citizenship Act for a definition of the word, then the right would apply to natural persons only. However, there are other lines that a court could take in this respect. Firstly, the court could favour a less restrictive interpretation of the term 'citizen'. Secondly, the court could disregard the corporate veil and look to the members of the company, and, logically, decide whether or not these individuals are 'citizens'. Thirdly, the court could allow the labour broker to show that it has a sufficient interest in the outcome of the matter, thereby eliminating the need for it to bring itself under the scope of the right to freedom of trade.

It is clear that any legislation banning labour broking would need to comply with the general limitations clause. Here it may be possible for our hypothetical labour broker to show that there are less restrictive means of achieving the purpose of protecting workers' rights. Either the formulation of a more appropriate regulatory framework for the industry or simply an improvement on the current enforcement mechanisms may suffice.

Therefore, returning to a comparison of the two jurisdictions, unlike in the Namibian case the South African labour broker would need to overcome the initial hurdle of establishing either that it is a 'citizen' entitled to the Constitutional right to freedom of trade, or that it has a sufficient interest in the outcome of the case. Once this hurdle has been overcome, it could be argued as unlikely for the court to find that the employment relationship in the labour broker industry has 'no basis in law' (as did the Namibian court). This is because what is being challenged is exactly that, ie the unlawfulness of what was previously a lawful practice. Instead, the court is likely to focus on whether or not the ban of an established industry is constitutional, not whether the practice 'fits' within the common law relating to employment contracts. The court may then conclude that although a decision to ban labour broking is rationally connected to a legitimate purpose, less restrictive means exist for the achievement of that purpose.

In any event, given the current economic crisis an outright ban of the industry should seem less feasible. Such a move would shut the doors of many businesses and result in the loss of many more jobs. A forced employment strategy whereby temporary workers are contracted as permanent staff members may indeed save jobs in the short term. However, it is unlikely that a compulsory increase in labour costs will be sustainable. Furthermore, being likely to discourage investment in an environment characterised by what are already considered to be stringent measures for permanent employees, a ban could prove fatal from a macro-economic perspective. Economic considerations aside, the poor enforcement of existing regulations provides a bad reason for a ban. What remains to be seen is perhaps just how powerful the trade union lobby actually is.


This article by Greg Palmer was published on Webber Wentzel's website on March 16, 2009


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