15 November 2021 by , and Employment Law Alert

Mind the [wage] gap: The implications of the proposed Wage Ratio Report in the Companies Act Amendment Bill

On 1 October 2021, the draft Companies Act Amendment Bill was published for public comment (Bill).

The Bill proposed wide-ranging amendments to the Companies Act 71 of 2008 (Companies Act), including the introduction of a wage ratio report which will require public companies and state-owned entities to produce a report that outlines the difference between the company's highest paid and lowest paid employees. The proposed amendment will be inserted as section 30A to the Companies Act.

On 6 October 2021, our Corporate & Commercial team published an alert which analysed the implications of the proposed amendments in the Bill in substantial detail. We focus in this alert on an analysis from an employment law perspective.

International best practice?

The proposed wage ratio report will require companies to disclose the remuneration of certain key individuals. This is by no means a new phenomenon as similar requirements already exist in the US, Australia and the UK, albeit under a different guise.

In the UK companies are required to provide reasons for changes to their pay ratios and must also include data addressing gender pay gaps.

In Australia, shareholders can compel directors to cease operating immediately if a company's remuneration plan is voted against at two consecutive annual general meetings (AGMs).

What will the wage ratio report look like in South Africa?

In terms of the proposals, the wage ratio report will have to disclose, amongst other things:

  • total remuneration of the highest paid employee;
  • total remuneration of the lowest paid employee;
  • average and median remuneration of all employees; and
  • the remuneration gap reflecting the ratio between the lowest and highest paid employees.

The wage ratio report will be published on an annual basis and will have to be approved by shareholders at the company's AGM.

Is there a difference between the wage ratio report and the section 27 EEA report?

The Employment Equity Act 55 of 1998 (EEA) requires an employer to submit a report to the Department of Employment and Labour (DEL), which discloses the remuneration and benefits received at each occupational level. The Employment Equity (EE) Report requires an employer to take proactive steps to address unfair discrimination in matters relating to the remuneration of employees.

The spirit of the EEA encourages companies to reduce remuneration gaps between executives and other employees through monitoring to establish benchmarks and norms. However, the EEA only requires monitoring of the gap and does not impose an obligation to close the gap. At a narrow level the objectives of the proposed wage ratio report are aligned to those set out in section 27 of the EEA.

The wage ratio report will require the approval of shareholders at the AGM and once published, it will be a public document, whereas a company submits its EE Report to only the Director-General of the DEL.

The draft Employment Equity Amendment Bill is awaiting National Assembly consideration. There are proposed changes which require employers to take into account the National Minimum Wage Act 9 of 2018 when publishing their EE Report. This reinforces the legislature's desire for employers to address wage discrepancies.

What does organised labour have to say about the wage ratio report?

Both organised labour and Business Unity South Africa (BUSA) at the National Economic Development and Labour Council (NEDLAC) support the notion of the wage ratio report in principle. However, it is worth noting that BUSA and organised labour have raised two concerns.

The first concern relates to the voting and implementation of the wage ratio report at the AGM. Business favours the option that this should be an advisory vote and therefore not binding. However, labour favours the option that the vote should be binding and have the status of a special resolution (with 75% of the shareholders having to approve the wage ratio report).

The second concern relates to the amounts that will form the basis of the calculation of the ratio between the lowest paid and highest paid employee. Both business and labour favour the disclosure of the ratio between the top 5% highest paid and top 5% lowest paid employees. However, business has suggested an “on-target remuneration” of executives to be used to allow for a better yearly comparison. On the other hand, labour has suggested that the executives' actual annual remuneration should be used as the yardstick.

Neither the current Companies Act nor the Bill defines the term “remuneration”. This will be an area of debate as it is in the arena of employment law. In the workplace what and what does not constitute remuneration is not always clear.

The Bill is also silent on whether the ratio between the highest and lowest paid employees should be the gross or net salary of the individuals concerned and if sub-contracted employees need to be considered as part of the report.

The term “employee” is also not defined in the Bill and this will inevitably give rise to uncertainty when taking into account sub-contractors and temporary service employees, to name a few categories of persons who do not neatly fall into the traditional category of an “employee”. It is worth noting that a definition of an “employee” exists in terms of prevailing employment and tax law, but there is no definition of “employee” in the Companies Act, as mentioned earlier. Who constitutes an employee in the “new world of work” is something which will also need to be properly considered as the concept of an employee in the hybrid/platform world of work begins to take shape.

Conclusion

The publication of the wage ratio report will increase transparency on remuneration. While new to South Africa, the concept of wage ratio reports is not a novel phenomenon abroad.

Whilst in some parts of the world gender pay statistics are also to be published, this is not as yet the proposed requirement in South Africa. This is likely to become part of the wage ratio report in time to come.

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