IN THE SOUTH AFRICAN LOCAL GOVERNMENT BARGAINING COUNCIL

/in ,

Exemptions Panel: Senior Panelist: A.Singh-Bhoopchand
Financial Expert: Ria von Ronge
Applicant’s representative: A. Khampha- Khampha Attorneys Inc
First Respondent’s Representative: Advocate S.Harvey instructed by Francois Du Plessis Attorneys
Second Respondent’s Representative: S. Osai , Ndou Attorneys Inc

DETAILS OF HEARING AND REPRESENTATION

  1. This is an application for the exemption of certain provisions of the SALGBC Salary and Wage Collective Agreement by the applicant, West Rand Municipality. The applicant was represented by Mr A.Khampha, an attorney from the legal firm Khampha Attorneys Inc. The First Respondent was represented by Advocate S. Harve, instructed by Francois du Plessis Attorneys. The second Respondent was represented by Ms S.Osai, an attorney from the legal firm Ndou Attorneys Inc.
  2. The matter was initially scheduled for hearing on 17 November 2021. The matter was postponed on that day by agreement between the parties, and oral argument was eventually heard on 23 February 2022. In addition to the oral argument, the applicant submitted a bundle of documents comprising of supporting documents to its application as well as supplementary submissions to its application and Replying submissions to Second Respondent’s submissions
  3. Both respondents oppose the application and presented both oral and written submissions

BACKGROUND

  1. On or about 18 October 2021, the applicant referred, to the South African Local Government Bargaining Council (SALGBC) an Application for Exemption from certain clauses of the Salary and Wage Collective Agreement signed on 15 September 2021 (the Agreement). Exemption is sought in respect of clauses 6.1,6.2, 7.1 & clause 11 of the agreement, for the 2021/2022 financial year. The exemption is sought in respect of 335 municipal employees. In broad terms the reasons for the application and factors which this panel is asked to consider, are as follows:
  • The employer is unable to afford the costs of the whole or part of this agreement.
  • The Applicant is under financial distress and is currently under Section 139(5)(a) of the Constitution of the Republic of South Africa
  • Council has approved a budget of 0% salary increments and is currently in the process of implementing a Financial Recovery Plan.
  • The applicant has always complied with the provisions of the Agreement in the past
  • Supporting data in respect of the Financial Recovery Plan as well as Financial data
  1. The provisions in respect of which the exemption is sought:
  • The exemption is sought in terms of clause 6.1 of the agreement which provides for a salary increase of 3.5% in respect of all employees covered by the agreement , with effect from 1 July 2021;
  • Clause 6.2 of the agreement, which provides, in addition, for a once-off non-pensionable cash allowance of R4000 for employees earning a basic salary of R12 500 or less, and R3000 for employees earning a basic salary of R1251 or more;
  • Clause 7.1 of the agreement, which provides that the minimum wage payable in the sector shall be increased by 3.5% to R8620,79 per month;
  • Clause 11 of the agreement, which stipulates that any benefits or conditions of service that ordinarily increase by virtue of a link to the increase in the salary of the employee shall increase by the same rate as the salary increase in a particular financial year.

SUMMARY OF SUBMISSIONS OF THE APPLICANT IN SUPPORT OF THE EXEMPTION APPLICATION

  1. It is submitted that the Municipality is in financial distress and is also technically insolvent for the previous three financial years as its liabilities exceed its assets. The Municipality is 96% dependent on grant funding with average increase of 2% on equitable share while the CPIX index increased by 3.9%. The Municipality already has a 1.9% shortfall relating to its ability to service monthly obligations. An increase in employee related cost will place the Municipality in a worse financial situation than it presently is in.
  2. It was evident from the budget that was tabled before Council in May for approval, that the municipality had an unfunded budget and there was a need for cost cutting measures. The budget was approved on 10 June 2021 on zero% salary increase basis.
  3. The Municipality funding is made up of 96% of grants, and 4% is made up from rentals. The Municipality does not provide bulk services of water, electricity, & domestic waste disposal systems.
  4. The Municipality provides humanitarian services, which are fire and health services, both of which are unfunded. This has contributed to its expenses surpassing its revenue.
  5. The financial statements for 2020/2021 reflect that the total liabilities of the Municipality exceed its total assets significantly by R108 million.
  6. The “Quarterly financial report -30 September 2021 shows that the employee related cost being overspent by 6% (R3 million) on the first quarter when actual expenditure is compared to budgeted expenditure. This is due to management honouring a settlement agreement which the municipality had with local organized labour during the month of July 2021 to settle the remaining 2,25% salary increment owned from the previous collective agreement. The report also reflects that the municipality is under severe financial pressure.
  7. Annual salary increases were not budgeted for. This was influenced by the financial position of the municipality. The tabled budget was assessed as unfunded. Based on engagements with Treasury and the fact that the budget was regarded as unfunded and the possibility of the equitable share being withheld, the decision was made not to budget for the increases.
  8. The other considerations informing the decision not to include increases in the budget and to apply for exemption is that the municipality’s financial position continues to make it difficult for it to pay employee salaries.
  9. The municipality is currently in the process of implementing a financial recovery plan and other cost containment measures to ensure financial viability. All costs have been reduced (contracted services and other operating costs ) other than employee related cost which remains high and constitutes more than 75% of costs which is way above the norm of 33% and a salary increase for the financial year 2021/2022 will further place the municipality under immense financial strain.
  10. The municipality has been committed to turnaround it’s financial situation. The financial strategy was outlined in terms of short term, medium term, and long-term goals. Several short-term goals have been achieved.
  11. Should the municipality decide to implement the bargained increment, this will increase the employee related cost by R7.9 million. This will further increase employee related costs from being 77% to 78% of the total budgeted expenditure. The 3.5% increment translates to an amount of R6 860 00,00; the R3000 once off translates to an amount of R1008 000,00 and the R4500 once off translates to an amount of R45000,00. The total amount that the municipality would be required to pay if the exemption is not granted is R7 913 000,00.
  12. The municipality has exhausted its reserves. There is therefore no money in the investment account that could be used to fund salary increases.
  13. There has been a reduction in the RSC levy replacement grant paid to the municipality because of the covid 19 pandemic. The municipality receives three tranches of equitable share and RSC levy grant during July, December, and March. These grants are utilized for operational purposes. If these grants are not received from the National Government due to the Council of the municipality approving a deficit or unfunded budget, the municipality will not be able to continue as a going concern and will not be able to pay salaries.
  14. The outgoing councilors have finished their term without receiving salary increases since 2017 and Senior Managers have not received their bonuses from 2017 to date and from 2019 have not received increases.
  15. The Municipality has honoured the commitments outlined in the previous Collective Agreement-however a further increase will worsen the financial situation. In previous financial year and in relation to the previous salary and wage collective agreement, the municipality managed to negotiate with labour to give an increase of 4% instead of 6.24%
  16. Should the municipality be ordered to pay salary increases, the financial pressures of the municipality will increase . This will have a cumulative effect in the medium to long term as the budget will be affected every year, which may ultimately force the municipality to evoke section 189 of the Labour Relations Act which may consequently increase unemployment in the West Rand region. The other risk factor is that National Treasury may not transfer equitable share tranche to the municipality

SUMMARY OF FIRST RESPONDENT’S SUBMISSIONS

I summarise only the submissions in response to applicant’s motivation for the exemption.

  1. It is submitted that the motivation is without merit. The Municipality is experiencing cash flow problems, but these should be better managed. From the documentation supplied in support of its application as well as official documents available in the public domain:
  • The municipality received unconditional grant funding of R223, 746 000 for the 2021 year
  • The municipality severely overspent last year on overtime and allowances: R79,419 on overtime, R844,927 on acting allowances, and the astonishing figure of R8 896,307 on standby/night allowances. This resulted in overspending amounting to R5.9m over budget in the 2020/2021 financial year
  • The municipality had R49,756 in cash and cash equivalents as at 30 September 2021 which can be made available to fund the bargained increases.
  1. In consideration of the prescribed factors, it is submitted that the municipality’s supporting documents do not justify the exemption sought.
  2. It would be unfair to the employees to deprive them of the increase. Municipal workers nation-wide are receiving the increase.
  3. Municipal workers cannot be called upon to subsidize government, business, or municipal consumers , especially not when monies have been irresponsibly spent by those entrusted with the duty to budget and to spend the budget.
  4. It may be unfair to other Municipalities which may be in a worse financial position if this municipality is excused from the bargain. It would arguably set a precedent which would undermine the bargaining agreement itself.
  5. The financial information discussed above demonstrates that the increases are affordable, even if difficult to afford. It is submitted that the municipality must afford the increases, even if this requires adjustments in other areas, because of the primacy of collective agreements.
  6. Even where a municipality has cash flow problems, these are not insurmountable in conditions in which there is at least some available cash.
  7. The bargain was made by the bargaining parties in full knowledge of the economic challenges of the past 18 months. The salary increases of 3.5% are far below the usual bargained increases which have been inflation beating for many years.
  8. The municipality must arrange its affairs so as to pay the increases.
  9. The municipality did not make provisions for the bargained increase.

SECOND RESPONDENT’S SUBMISSIONS

  1. As with First Respondent’s submissions, I do not summarise the legal framework and case law but shall refer to same in my evaluation. I summarise only the submissions in response to the applicant’s motivation for the exemption.
  2. It is submitted that the municipality had no intention to comply with the agreement even before the agreement was entered into. The agreement came into effect on 15 September 2021, but a decision was already taken on or about 10 June 2021 to curb increases in employee related costs by opting to apply for exemption from an agreement that was yet to be concluded. The circumvention of the agreement was premeditated.
  3. It was not envisaged that when the parties to the agreement set out the terms of the exemption clause that it would be used to provide a simplistic way-out of the agreement and promote the sole interest of employer parties.
  4. A section 139(a) mandatory intervention does not entitle the municipality to apply for exemption. Many municipalities under administration or intervention have found a way to comply with the agreement because they recognize that they are bound thereto. On the municipality’s own version, it implemented the increase of the previous collective agreement.
  5. The financial difficulties experienced by municipalities has already been taken into account during the bargaining process. The bargained increase for the current period is less than the previous year.
  6. Many benefits to employees have already been cut, contrary to the submissions of the employee that it has reduced all employee related costs, for example employees cannot sell their leave days which would have been a way to earn more income; employee study subsidies have been discontinued; leave provision to employees has since been discontinued; the municipality has already cut salary notch increase and long service benefits.
  7. As per the audited statement that accompanied the application, it is clear that the municipality has presented contradictory versions in its new submissions as compared to the version in the audited statement.
  8. The audited amounts reflected in respect of overtime and acting allowances are exorbitant.
  9. The municipality continues to recruit new employees despite its claim that its employee costs are exorbitant. It is submitted in any event that the bulk of employee costs are for senior management.
  10. It is apparent from the Financial Recovery Plan that the Fire Fighting and Health Services are being provided solely by the municipality and not by the local municipalities, but that the funding for these services is shared with the local municipalities. The municipalities own version is that these areas are underfunded and have contributed to the current financial position. It is submitted that services should follow the funds. If local municipalities are receiving an equitable share for functions which they do not perform, the municipality must either recoup those funds to support the services or simply transfer/delegate the services to those municipalities to perform.

EVALUATION

The applicable Legal Principles

  1. Collective agreements are sacrosanct. However, despite this, the LRA provides in section 30(k) that the Constitution of every Bargaining Council must provide for a procedure for exemption. The purpose of providing for a power to exempt a particular employer from an agreed term is to allow for special or unforeseen circumstances. In Kem-Lin Fashions 1, Zondo JP held that the LRA requires collective agreements to encompass exemption provisions because:
    …. There may be cases in which individual businesses or entities or employers and employees or their trade unions may experience hardship.

Thus, the Bargaining Council in its role as an umbrella body has the power to authorize an override of the Agreement in a proper case. However, in so doing it must act in the interests of both the employer and the employees.

  1. An exemption application must be considered in the light of the overall interests of the sector which has voluntarily formed the Bargaining Council and concluded the Collective Agreement. Those interests include fairness to both sides, as well as maintaining confidence in the institution of collective bargaining itself. If exemptions are too easily granted, this could undermine the entire statutory scheme.
  2. Overall, exemption applications fall to be narrowly construed. The starting point is that the Agreement is binding, and the exemption procedure is a “safety valve” in the hands of the Bargaining Council, the purpose of which is to address undue hardship which would have unforeseen results which would be unfair to the parties and run counter to the interests of the sector.2

1 Kem-Lin Fashions CC v Brunton & Another (2001) 1 BLLR 25 (LAC)

2 See: Du Toit et al Labour Relations Law: A Comprehensive Guide (Lexis Nexus) 6ed as summarized in IMATU’S submissions

  1. The party applying for an exemption bears the onus to prove the objective facts supporting the grounds upon which it relies to justify the exemption sought. The decision concerning whether to grant the exemption entails the exercise of a discretion, to be exercised in consideration of all relevant factors including those listed in the Agreement

Factors Specific to Exemption Applications in the SALGBC

  1. The Agreement at clause 15.1.2 provides mandatory requirements for exemption applications. Clause 15.1.15 provides for the criteria and other factors that shall be taken into account when determining an exemption application which is summarized as follows:
  • Any written or verbal substantiation provided by the Applicant or a party to the SALGBC
  • Fairness to the employer, its employees, and other employees in the local government sector;
  • Whether an exemption, if granted would undermine this agreement or the collective bargaining process;
  • The employer is unable to afford the costs of the whole or part of this agreement;
  • The employer has short-term cash flow problems necessitating a limited exemption;
  • Unexpected economic hardship; job creation and/or loss; Whether budgetary provision, approved by National Treasury, was made for the implementation of the obligation arising out of the collective agreement;
  • Any process or directives as may be agreed to by the executive committee from time to time;
  • Any other appropriate factor

This Application

  1. The crisp issue that drives this application is affordability. It is not disputed that the applicant is facing financial challenges, and to this end it has been placed under a section 139 intervention. A Financial Recovery Plan is currently well under way. It falls to be determined whether on the objective facts and despite the financial challenges that the bargained increments cannot be met.
  2. Firstly, the applicant has overstated its total employee cost in their submissions. Based on the Audit report and Annual Financial Statements, the municipality has an unqualified report which means that the information reported is materially reliable. In terms of this report, the salary cost of the municipality represents 66 per cent of the total expenditure of the 2021/2022 budget year. (A total of R192 million in respect of employee cost against a total expenditure of R287 million). Applicant however claims that the total employee cost represents 77 percent of the total expenditure.
  3. The budget performance of the municipality for the current year shows that the municipality is taking cost containment seriously. All costs have been significantly reduced with the Finance Recovery Plan. All exorbitant contracts have been terminated. The current reporting shows a surplus of R72 million vs the R38million deficit that was included in the unfunded budget. The budget submitted for 2021/2022 is:
  4. Municipalities must compile realistic budgets which the Municipality has failed to do. An adjustment budget has not yet been submitted, despite National Treasury’s continued communication to request such in terms of the legislation.
  5. Based on the actual figures reported in December 2021 it seems that the Municipality might have submitted an unfunded budget without properly addressing all options of financial savings. If the Municipality continues to operate in accordance with the strict cost containment (and there is no reason why it should not), it should potentially render a surplus at the end of June 2022. There are several reasons for why the Municipality should potentially afford to honour the bargain:
  • According to the updated Financial Recovery Plan, the cash deficit for the year is projected at R10million. This figure is not representative of the actuals reported as at 31 December 2021. If the current trend on cutting down on spending is progressing, a surplus should reasonably be achievable.
  • Insufficient budget. The Municipality did not budget for the annual increase of salaries and notch increases were suspended. This can and must be rectified in the adjustment budget.
  • Unfunded budget. This means that based on the Audited Financial Statements, the budget that was adopted by Council, the Municipality cannot sustain its current obligations as submitted in the budget. The revenue that will be rendered plus the cash resources is not sufficient to pay the current creditors and the planned expenses for the 2021/2022 year. This is in contravention of the Municipal Finance Management Act.
  • The consequences of submitting an unfunded budget , is that the National Treasury could withhold the Equitable Share that is the 96% revenue source of the municipality. It is the responsibility of the Municipal Manager who is the accounting officer to ensure that legislation is adhered to. It is his responsibility to ensure that funds are available. It is inconceivable that the Municipality provides Fire and health services without funding. The items that have been identified as additional funding sources from Sector Departments can and must be followed up. The Second Respondents submission that funds must follow the services is apposite. It is unfair for employees to have to carry the burden of poor management decisions. Based on the dire consequences of an unfunded budget it is unlikely that this trend will continue. There is no indication that this Municipality, like the many other Municipality that face difficult financial circumstances, would be allowed to collapse. Given the Municipality’s commitment to recover financially, a potential surplus to fund the increments is feasible.
  • It is unlikely that the granting of this exemption will be the sole factor that will render a funded budget as opposed to an unfunded one. The financial challenges are much broader and are being addressed in the Financial Recovery Plan.
  • It is also noted that the applicant submitted that the equitable share grant was reduced during the covid 19 pandemic. Given the improvement in the pandemic climate, there is no reason for the municipality to continue to receive a reduced amount.

CONCLUDING REMARKS

  1. If the Municipality continues to follow the Financial Recovery Plan and implement absolute cost containment, it would potentially reasonably be able to honour the agreement according to a recalculation of expenses based on the section 71 published results for Quarter 2.
  2. The Financial motivation of the Municipality is not compelling. Much of the financial reporting cannot be verified by documents that ought to be in the public domain but are not available on the website of the municipality.
  3. It would be unfair to deprive the employees of the increase. Every other municipality has honoured the agreement even though many have been placed under administration and may very well be in a worse financial situation.
  4. It is unfair for employees to bear the brunt of poor management decisions.
  5. Honouring the agreement supports the primacy of collective agreements and promotes labour peace, an underlying factor in the system of collective bargaining.

OUTCOME

1. The applicant has failed to show that it is unable to afford the salary increase together with the once off payments for specific employee for the 2021/2022 financial year.

2. The application for exemption from clause 6.1; 6.2; 7.1 & clause 11 of the Salary and Wage Collective Agreement is dismissed.

3. I make no order as to costs

Download PDF