THE goal of most businesses is to maximise profits and reduce costs. This goal may have its own limitations, but the point remains that there is need to reduce business costs.
How can an employer reduce or cut labour costs? This is one of the questions that the writer seeks to answer in this article from a legal perspective. By way of a definition, employment cost is the actual amount paid for all employees’ wages and benefits during or after employment. This includes terminal benefits, wages, salaries, commissions, employer match of taxes such as social security and medical aid, employer paid insurance premiums and pension deposits as well as the cost of all other fringe benefits. In cost accounting, employment expsenses are called labour costs.
Labour costs can either be variable or fixed. Variable labour costs fluctuate based on the amount of production input or output, for example, labour cost for hiring casual or seasonal employees. Fixed labour costs are expenses that remain the same for a reasonably long time regardless of the company’s production output, for example, the cost of hiring directors, managers and supervisors.
These labour costs can either be direct or indirect. Direct costs include expenses associated with hiring individuals responsible for producing the company’s consumer goods or services, examples include the costs associated with hiring assembly line workers, production supervisors, delivery truck drivers and quality control inspectors.
Indirect costs include the costs associated with hiring all employees working in the general or administrative positions in a company. Examples of these employees include office supervisors, accountants, salespeople, maintenance personnel and administrative assistants.
In cost accounting, an employee’s labour cost per hour is calculated by adding the gross wages to the total cost of related expenses (including annual payroll taxes and annual overhead), then dividing by the number of hours the employee works each year. This formula (depicted below) will help determine how much an employee costs his/her employer per hour.
Labour cost per hour = Gross wages + related expenses (Hours worked per year).There are a number of cost cutting measures in terms of the Labour Act (Chapter 28:01). One of the measures is to properly manage vacation leave days. In terms of section 14A of the Act, an employee is entitled to vacation leave being one-twelfth of their qualifying year of service in each year of service. Qualifying service means any period of employment following the completion of the employee’s first year of employment with an employer.
If one was employed on January 1, 2019 their leave days would have started accruing from January 1, 2020. In terms of the Labour Act, every employee has a right to accrue leave up to 90 calendar days. It is therefore advisable for employers to make sure that employees take their annual leave days in order to reduce accrual of such days. The accrued leave days become a cost that the employer will be obliged to pay in cash upon termination of employment.
In an attempt to cut cost, is it lawful for the employer to state in a contract of employment that the maximum accrual is 30 days? This is contrary to the Act and may be held to be an unfavourable condition to the employee hence unlawful.
Can an employer direct an employee to take paid leave and later suspend the employee without salary and benefits? Yes. This is lawful.In the case of Ziso v Keche SC34/98, an employee had been sent on paid leave to facilitate investigations being conducted by the employer. He was subsequently suspended without salary and benefits and later dismissed. He challenged the dismissal arguing that his suspension had been done from the time that he had been sent on leave, but Supreme Court held that there was nothing improper in sending him on leave with salary and benefits.
Can an employer direct an employee to take unpaid leave for example in circumstances where there is no business? This is unlawful. If there is insufficient work, then an employer ought to engage in special measures such as short-time working hours or shifts system.
In terms of the Labour Act, there are special measures that the employer can take to cut costs and avoid retrenchment. Short time work measure for not more than 12 months is one of the measures. This is when an employee is paid hourly, equivalent of their weekly or monthly wage for the hours they have actually worked. The employee must be paid not less than 50% of their weekly or monthly wage. This has great potential to reduce the wage cost in appropriate cases.
The employer may also engage in shift systems for a period of not more than 12 months. This is where the employer divides into shifts all the employees and requires each shift to alternate on half days, days, weeks or months. Each employee on shift is paid for the hours actually worked. Again this will help reduce costs as each time the employee is not engaged in full time work is regarded as unpaid compulsory leave.
In the event that it becomes necessary to cut costs through retrenchment, then the employer can retrench the employees in terms of the Act.
Retrenchment entails termination of the employee’s employment for the purpose of reducing expenditure or costs, adapting to technological change, re-organising the undertaking in which the employee is employed, or for similar reasons, and includes the termination of employment on account of the closure of the enterprise in which the employee is concerned.
Therefore when an employer retrenches, the reason for retrenchment must not only be stated, but it must also be lawful. Supporting information justifying the existence of the reason for retrenchment must be available.
Retrenchment reduces the wage bill for the employer. Furthermore, unlike before the year 2015, the retrenchment package payable now is reasonably low for the employer. The package in the broader sense is ordinarily constituted of statutory terminal benefits such as cash in lieu of leave, arrear salaries, if any, gratuity, if any and minimum retrenchment package.
The minimum retrenchment package payable in terms of the Labour Act is an amount not less than one month’s salary for every two years of service. Before 2015, employers would be required to pay in addition to statutory terminal benefits, service pay, severance pay and relocation allowances. Clearly, it is now cheaper to retrench provided the employer has complied with all the legal procedures.
Furthermore it is now possible in terms of the Labour Act for an employer to apply to the relevant employment council or retrenchment board for exemption to pay the minimum retrenchment package.
Over and above measures that are specially provided for in the Labour Act, there are certain ways through which an employer can lawfully cut labour costs. These are as follows.
The employer can negotiate with the employee to vary material terms of contract for example salaries. The employer and the employee can agree to have reduced salary. In the event that the employer and the employee are not compatible on certain issues, for example, on allowances, the employer can seek the employee’s consent to have mutual termination of employment contract. This can be quick, hence less costly.
The employer must ensure each employee has a written contract to avoid future disputes that might be costly in terms of increasing legal costs. Where appropriate, the employer should make use of fixed term contracts, seasonal and casual workers as opposed to permanent contracts.
Furthermore, where appropriate, the employer should freeze hiring, discourage overtime where necessary, encourage commission based earnings as opposed to fixed salary.
Generally, use of technology for tasks that can be automated is cheaper with time. The employer should therefore invest in technology which reduces manual labour costs. However, the employer needs to be careful as employees may abuse internet services by spending more time on Facebook, Twitter and WhatsApp.
It is also advisable to outsource tasks which are not critical instead of having employment contracts with individuals. Outsourcing can be the best way of getting catering or cleaning services, depending on the business of your company.
In conclusion, reducing labour costs, just like reducing any other cots, may lead to profitability and long life for your business. This may benefit the shareholders, employees and the society at large.
Mavhondo is a legal practitioner and current executive secretary for Zimbabwe Economics Society. These weekly New Perspectives articles are co-ordinated by Lovemore Kadenge, immediate past president of the Zimbabwe Economics Society. — firstname.lastname@example.org or mobile: +263 772 382 852.