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South Africa: Law Designed to Spur Youth Hiring Takes Effect

(Jan. 9, 2014) On January 1, 2014, the Employment Tax Incentive Act No. 26 of 2013 (582 GOVERNMENT GAZETTE (Dec. 18, 2013)), aimed at spurring youth hiring through tax incentives, took effect. (Zuma Signs Youth Wage Subsidy Bill into Law, MAIL & GUARDIAN (Dec. 19, 2013).) The government of South Africa is hoping that this program will help reduce the country’s high youth unemployment rate by creating opportunities for unemployed youths “to gain work experience and develop their skills, thereby improving their prospects for better employment opportunities.” (President Jacob Zuma Signs the Employment Tax Incentive Bill into Law, SOUTH AFRICA REVENUE SERVICE (Dec. 19, 2013) [requires user name and password].) The cost of the program for the government in lost revenue is estimated to be ZAR1billion (about US$93 million) to ZAR2 billion (about US$186 million) over a two-year period. (Employment Tax Incentive Bill Passed After Three-Year Battle, PARLIAMENTARY MONITORING GROUP (Oct. 15, 2013).)

The legislation seeks to improve youth employment, employment in certain geographic areas, and employment in some economic sectors by putting in place temporary wage subsidies. Private sector employers that hire workers aged 18 to 29 will be able to utilize the subsidy to reduce their tax payable every month by the applicable incentive amount. (Employment Tax Incentive Act, § 6.) Employers in special economic zones and in industries designated by the Minister of Finance that hire workers of all ages will also qualify for the subsidies. (Id.) However, the application of the program, which will be in place for a two-year period, is limited to jobs that pay above the applicable minimum wage, if any, or from ZAR2,000 to ZAR6,000 (about US$187-$561) per month. (Id. §§ 4 & 6.) The program will not apply to domestic workers and employees related to the employer. (Id. § 6.)

The subsidy works on a sliding scale. For the first year of participation in the program, employers that hire qualifying workers will receive incentives equal to 50% of the monthly wage of any qualifying employee earning ZAR2000 or less in monthly salary. (Id. § 7.) The amount of subsidy available to employers for jobs that pay ZAR2,000 to ZAR4,000 (about US$374) in the first year of the program will be ZAR1,000 (about US$93). (Id.) For jobs that pay from ZAR4,000 to ZAR6,000, the subsidy available in the first year of the program will be graduated, from R1,000 for those earning ZAR4,000 to zero for those earning R6000. (Id.) The subsidies will be cut in half in the second year. (Id.)

The legislation puts in place a safeguard to protect non-qualifying employees. This had been one of the concerns raised by trade unions, which opposed the measure. (Zuma Signs Youth Wage Subsidy Bill into Law, supra.) For instance, the Congress of South African Trade Unions (COSATU) opposed the legislation, arguing, in part, that it would lead to the “substitution or displacement” of unsubsidized workers. (Employment Tax Incentive Bill Passed After Three-Year Battle, supra.)

The legislature sought to prevent discrimination against older workers by including a provision to penalize employers that displace non-qualifying employees for the purpose of gaining access to the subsidies. If an employer replaces a non-qualifying employee with a qualifying one and it is discovered in the process of a dispute resolution, including court or arbitration procedures, that the employer unfairly dismissed the non-qualifying employee, the employer will be fined ZAR30,000 (about US$2,805) and may be disqualified from accessing the applicable subsidies. (Employment Tax Incentive Act, § 5.)

South Africa has a massive youth unemployment problem. Seventy percent of its population under the age of 35 is said to be unemployed. (Lerato Mbele, South Africa’s Huge Youth Unemployment Problem, BBC NEWS (Nov. 20, 2013).) A 2010 discussion paper from South Africa’s National Treasury shows that the general unemployment rate in the country at the time was 25.3%; however, youth unemployment rates were much higher, with the rate for those aged 20-24 at 49.2%, and the rate for those aged 25-29 at 33.8%. (National Treasury, Confronting Youth Unemployment: Policy Options for South Africa, Discussion Paper 13 (Feb. 2011).) Older workers enjoyed relatively low unemployment rates; the rate for workers aged 55-59 was 8.6%, and the rate for workers aged 60-64 was 4.2%. (Id.)