The Companies Amendment Act 16 of 2024 (Amendment Act) heralds a transformative era in corporate governance, significantly enhancing transparency requirements in remuneration and vertical pay-gap disclosures.
Signed into law in July 2024, the Amendment Act introduces stringent new reporting obligations for public and state-owned companies. While certain provisions took effect on 27 December 2024, the commencement date for the remuneration and pay-gap disclosure requirements under sections 30A and 30B is yet to be proclaimed.
Drawing upon existing legislation, codes, guidelines, and legal principles, we delve into the scope of these noteworthy disclosure obligations, the companies and employees affected, key insights from the South African Reward Association (SARA), and developing market practice.
Scope of pay-gap disclosures
Section 30B(3) of the Amendment Act mandates that public and state-owned companies disclose critical remuneration metrics, including:
- total remuneration of the highest-paid employee;
- total remuneration of the lowest-paid employee;
- average total remuneration of all employees;
- median total remuneration of all employees; and
- ratio between the top 5% highest-paid employees and the bottom 5% lowest-paid employees.
Section 30B of the Amendment Act defines ’total remuneration’ as encompassing all salary and benefits, including employer contributions to benefit funds, as well as any short-term or long-term incentives such as share options and incentive awards.
To ensure greater clarity, companies must break down total remuneration into constituent elements, reflecting its composition. Generally, ’total remuneration’ comprises: (i) total direct remuneration (the employee’s total guaranteed package and any short-term incentives); (ii) long-term incentives; (iii) dividends; and (iv) other amounts (eg, severance payments, gratuities etc).
Categories of companies covered
A strict interpretation of section 30B(3) suggests that these disclosure obligations apply at the individual company level rather than across a group of companies. This could imply that only the public company itself must report on the remuneration of its directors, prescribed officers, and employees, excluding subsidiary employees.
However, given the overarching objectives of transparency and accountability in Part C of the Companies Act 71 of 2008 (Companies Act), there is strong policy justification for extending these obligations to subsidiaries within a corporate group, irrespective of their public interest scores.
Many public companies are holding companies with no employees. The employees are employed in a service company established for the purpose of employing the employees, or in operating subsidiaries. If the word ’company’ is interpreted narrowly to exclude subsidiaries, it would lead to companies easily evading their reporting obligations by ensuring that all employees are employed in subsidiaries and not the public holding company. Companies that attempt to bypass these requirements by structuring their workforce within subsidiaries may face shareholder scrutiny.
Considering this, notwithstanding the specific wording of the new sections 30A and 30B (which, unlike other sections in the Companies Act, do not refer to a ’group of companies’), it would be difficult to justify a narrow interpretation of ’company’.
From a policy perspective, it would be prudent for the public entity to make the pay gap disclosures in respect of its own employees and in respect of the employees of its South African subsidiaries (ie, in relation to the group of companies). It must also be borne in mind that the remuneration report must be approved annually by shareholders, and it is possible that there could be shareholder pushback if the company were to limit its pay gap disclosures to its direct employees only.
For clarity, subsidiaries incorporated under foreign laws that directly employ workers in those jurisdictions are not subject to section 30B(3). The Amendment Act is designed to address excessive remuneration and inequality within South Africa, and extending its provisions to international subsidiaries would not align with its intended scope.
Categories of employees covered
The Amendment Act adopts the definition of ‘employee’ from section 213 of the Labour Relations Act 66 of 1995 (LRA). It is accordingly necessary to consider principles of labour law to form a view on which categories of workers are likely to be included and excluded from the pay gap analysis.
We are of the view that the following categories of workers fall within the scope of section 30B(3):
- Indefinite employees: permanent employees engaged for an unspecified period.
- Fixed-term employees: employees contracted for a specific period or project.
- Full-time and part-time employees: employees working either full-time or part-time, whether permanently or for a fixed term.
- Casual employees: individuals working less than 24 hours per month.
- Learners: workers under a learnership agreement as defined by the Skills Development Act 97 of 1998 (SDA). This temporary employment provides practical experience and training. The SDA defines terms like ’employee’, ’learner’, ’learnership’, and ‘SETA’ (Sector Education and Training Authority). The 2018 SETA Workplace Based Learning Programme Agreement Regulations include apprenticeships, internships and candidacies. Employers must comply with labour laws, establish employment agreements with learners, and apply the same workplace policies as for permanent employees. Employers engaging learners through a SETA are accordingly considered their employers. According to case law, interns not engaged through a SETA are still regarded as employees if they contribute to the company’s operations.
Excluded employees and special cases
We are of the view that the following categories of workers fall outside of the scope of section 30B(3):
- Independent contractors: individuals providing services without direct control or employment ties to the company (provided that such engagement does envisage a true independent contracting arrangement).
- Service provider employees: workers employed by third-party service providers, such as outsourced cleaning and security staff.
- TES (labour broker) employees: employees engaged through temporary employment services.
The exclusion of TES employees is a sensitive point, given that they may perform similar roles to directly employed workers and there are certain provisions in the LRA which, if triggered, deem TES employees to be the employees of the client company.
However, we are of the view that, until such time as further amendments are promulgated or regulations issued, the Amendment Act does not extend the disclosure requirements to TES employees.
The Amendment Act only incorporates the definition of ‘employee’ from the LRA into the Companies Act. This definition merely identifies who qualifies as an employee; section 213 does not specify who the employer of that employee is, nor does the LRA provide a definition of ’employer’.
Unlike the Basic Conditions of Employment Act 75 of 1997 and the Employment Equity Act 55 of 1998, the Amendment Act does not incorporate the LRA’s ’deeming provisions’, which determine whether a TES employee is considered an employee of the client company.
Insights from the SARA guidelines
The SARA has issued a Guidance Note on the Amendment Act to help companies interpret and implement the remuneration disclosure requirements effectively. Key observations from the SARA guidelines include:
- Broad inclusion of employees: SARA confirms that the LRA definition of ’employee’ is designed to cover as many individuals as possible, including learners, temporary workers, and expatriates working in South Africa.
- Sustainable reporting: Companies should ensure consistency in reporting methodologies to maintain comparability over time.
- Enhanced transparency: Companies are encouraged to disclose multiple remuneration metrics to enhance stakeholder trust.
- Reporting flexibility: Future amendments may necessitate additional disclosures, such as gender pay-gap analyses.
- Consistency in methodology: Any changes in reporting methodology must be justified, with prior year data restated for continuity.
SARA further recommends that companies consider voluntary disclosures beyond the statutory requirements, particularly in industries facing heightened scrutiny over remuneration disparities. Additionally, organisations should implement internal controls to ensure accuracy and reliability in their reporting processes.
Developing market practice on pay-gap disclosures
Although the disclosure requirements are yet to be officially enforced, early market trends indicate that several companies have proactively adopted pay gap reporting in line with the Amendment Act while others have elected to make partial disclosures.
While no universal benchmark for 5/5 ratios exists, disclosed data indicates a wide range of ratios. Some entities have opted to use alternative methodologies, including the Palma and Gini indices.
Conducting a pay-gap analysis for an organisation is a complex and time-consuming process and ought to be initiated well ahead of the Amendment Act coming into force so that companies are well-positioned to reflect the outcome of the pay gap-analysis in their next remuneration reports.
Conclusion
The Amendment Act represents a major step towards remuneration transparency and accountability in South Africa. While uncertainties remain regarding the exact implementation date, companies should proactively (i) conduct a pay-gap analysis for the organisation; and (ii) update their remuneration reports to make provision for the pay-gap disclosures. Investors and stakeholders are increasingly demanding fair and responsible pay practices, and non-compliance could lead to significant shareholder pushback.
Companies are advised to take a proactive approach in preparing these disclosures to ensure they meet regulatory requirements, shareholder expectations and stakeholder demands, reinforcing good corporate governance and equitable pay practices. Future developments in pay-gap reporting may introduce additional complexities, making it essential for businesses to stay informed and adapt to evolving standards.
