The proposed Employment Equity Amendment Bill would repeal Schedule 1 and increase penalties for contravention of the Act, by linking penalties to annual turnover of the employer. The Bill provides that fines will be equivalent to ten percent of employer’s turnover.
The proposed approach follows the penalty structure of the Competition Commission, which allows the Commission to impose a maximum penalty of ten percent of turnover. It should, however, be noted that the Commission applies a formula to calculate the fine, which takes a number of factors into account, and retains the principle of harsher fines for repeat offenders.
In The Competition Commission v South African Airways [2005] 2 CPLR 303 (CT), for example, the following formula was applied:
Nature, duration, gravity and extent of the contravention – three percent weighting, as it encompasses the widest range of factors
Loss or damage as a result of the contravention – one percent weighting – relates to the loss or damage suffered by consumers and/or competitors and is curtailed because of the rights of both parties to recoup their damages through civil action
Behaviour of the respondent – one percent sliding scale weighting – can work as an aggravating or mitigating feature
Market circumstances in which the contravention took place – one percent weighting – assesses the structure and history of the market and the actual effects the unlawful conduct had on its structure
Level of profit derived from the contravention – 0,5 percent weighting – low in recognition of difficulty of proof
Degree to which the respondent has co-operated with the competition authorities – 1,5 percent weighting on sliding scale, as a mitigating or aggravating feature
Whether the respondent has previously been found in contravention of the Act –2 percent weighting – designed to act as a deterrent against subsequent offences.50
The process of calculating the penalty figure thus takes into account a number of variables, which together may amount to a maximum of ten percent of turnover. The Commission has however yet to
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Competition authorities adopting an increasingly tougher stance, Nicolette Mudaly, Bowman Gilfillan, April 2009,
impose the maximum fine. In October 2009 the Competition Commission recommended that Telkom be fined ten percent of its annual turnover for the year ended 31 March 2009 – the first time the Commission had ever recommended the maximum fine. The matter has been subject to protracted litigation over nine years and is yet to be finalised.
RISKS
It is not clear whether the Department of Labour’s proposed imposition of a ten percent of turnover penalty replaces the existing gradation of penalties, whereby fines are charged at a higher rate for each successive contravention of the Act. The current system appears designed to encourage compliance, by being more lenient on first time offenders, and more lenient in respect of a first time contravention on each specific provision (this is also the model followed by the Commission, as described above).
Implementation of a standard fine of ten percent of turnover, applicable to all offenders, for all offences, may constitute a disproportionate response particularly in the case of first time offenders. It is likely to be particularly onerous for companies newly classified as designated employers (companies expanding from small to medium businesses, for example).
It is not clear whether the level at which fines will have a significant impact in improving levels of overall compliance. While the imposition of very severe fines on a small proportion of businesses may be effective in demonstrating the seriousness of contraventions and punishing affected offenders, it may not necessarily translate into improved compliance across the economy.
The proposed option carries significant risk of unintended consequences. Ten percent represents a considerable proportion of annual turnover. A fine of this magnitude could pose a significant threat to the continued viability of a company. Consultation with business representatives suggests that net profit generally runs at well below ten percent. The Retail Sector, for example, reports an average net profit of four percent of turnover, while the Food Sector reports net profit at just two percent of turnover. Fuel Retailers have a regulated profit margin, but an extremely high turnover owing to the large volumes of fuel which they buy and sell. In these and many other sectors, imposition of a ten percent of turnover fine could render businesses non-viable.
Possible unintended consequences may include the imposition of penalties contributing to company contraction and retrenchments, and even company closure, resulting in job losses and negative impacts on economic growth. Companies might also choose to split into component parts in order to fall below minimum thresholds. It is not clear that the risk of possible job losses is outweighed by the benefit of a more onerous penalty for non-compliance, nor that such penalties will translate into improved compliance.
The costs of fines may be passed on by companies to consumers. The Competition Commission provides an illustrative example – the prosecution of Tiger Brands for involvement in a bread pricing cartel was followed relatively quickly by the significant increases in bread prices.51
It should also be noted that the Competition Commission has encountered a number of technical challenges in the calculation of fines based on turnover. Specific cases have required the Commission to decide whether fines should be imposed on the basis of turnover of an entire group of companies, or limited on the basis of turnover of the specific division responsible for transgression, for example. The Commission has also documented considerable difficulties in prosecuting cases effectively. Commissioner Shan Ramburuth has noted that “Prosecuting cases is costly. Respondents are always better resourced than the Commission and have access to increasingly more sophisticated legal and economic expertise. Respondents also have an incentive to frustrate and delay.”52