Skip to content

South Africa: Directors’ duties (2 of 8) – knowledge of the key employment legislation and regulations affecting the company

13 May 2024
– 8 Minute Read

DOWNLOAD ARTICLE

Overview

  • The King IV Code provides that the directors should have sufficient working knowledge of the organisation ‘as well as the key laws, rules, codes and standards applicable to the organisation’. They are required to govern compliance with the applicable laws in a way that supports the ethical direction of the company and of being a good corporate citizen.
  • Not many directors have knowledge of the detailed employment legislation and regulations applicable to the company.
  • This article outlines the key employment legislation and regulations affecting the company that directors need to know and take into account.

This is the second in a series of articles on the duties of directors in relation to employment, employment law and employee benefits. Senior consultant Graham Damant, has discussed these issues at length with Bowmans’ partner Chris Todd in two ‘Value of Knowing’ podcasts. The first (on our website here) covers what boards in South Africa need to know about employment, employment law and employee benefits to meet their fiduciary duties avoid liability. The second (on our website here here) highlights the obligations and duties of boards in South Africa in relation to CEOs. Subscribe to’ The value of Knowing’ podcast on Apple Podcasts or Spotify.

In the first article in this series, we identified six themes in the King IV Code that apply to what directors need to know and do about employment law and employment generally. The first theme was that the King IV Code provides that the directors should have sufficient working knowledge of the organisation ‘as well as the key laws, rules, codes and standards applicable to the organisation’.  They are required to govern compliance with the applicable laws in a way that supports the ethical direction of the company and of being a good corporate citizen.

How, then, should the directors take steps to comply with this obligation and what will be sufficient for them to demonstrate that they have satisfied this requirement?

The first step is to identify the legislation and regulations. In order to discharge this obligation, the board should delegate responsibility to the CEO to identify all laws including the employment legislation and regulations applicable to the company and to advise the board. The board would also delegate responsibility to monitor developments and changes to the law and advise the board of the changes insofar as it affects the company.  The board would also delegate responsibility for compliance with the laws to the CEO. The CEO can in turn delegate responsibility to those executives with the appropriate skills and competencies to do so. The board would need assurance that this has been attended to and would need to be advised of the applicable laws and the state of compliance with those laws.

The question then is whether this would be sufficient for directors to demonstrate that they have discharged their duties properly.

Section 76 of the Companies Act requires that a director must exercise the powers and perform the functions of director ‘with the degree of care, skill and diligence that may reasonably be expected of a person… having the general knowledge, skill and experience of that director’.

Section 76(4) provides that the director will have satisfied the obligations imposed on them if ‘the director has taken reasonably diligent steps to become informed about the matter’. The director is entitled to rely on the performance of ‘one or more employees of the company who the director reasonably believes to be reliable and competent in the functions performed by the employee or the information, opinions, reports, statements provided’ by the employee or on ‘legal counsel, accountants, or other professional persons retained by the company…’ if they merit confidence. The directors are also entitled to rely on any person to whom the duty has been delegated.

The directors would accordingly have discharged their duties by a proper delegation of authority and then ensuring that they have been provided with the information of what laws are applicable and the status of compliance with those laws. In addition to the above it would be advisable for directors to at least have knowledge of the principal pieces of employment legislation applicable to the company and more importantly, to know when to seek advice in relation to employment issues. If the directors are aware of the principal issues contained in the legislation, they will at least know that, if the issue arises, they should seek professional advice.

The four key employment Acts that are applicable are the Labour Relations Act, the Basic Conditions of Employment Act, the Employment Equity Act and the Occupational Health and Safety Act. There are other Acts that impact employment, such as the Compensation for Occupational Injuries and Diseases Act, the Protection of Personal Information Act and the Pension Fund Act. There is also tax legislation that needs to be considered and, if the company is listed, the listing requirements may need to be considered, particularly in regard to share plans.

Non-compliance with the legislation can have serious consequences for the company and in some instances for the directors personally. Some of the major areas in each piece of legislation that the directors should be aware of and for which they should seek assurances from the executives regarding compliance are outlined below.

  • The Labour Relations Act governs collective bargaining and the various bargaining and consultation arrangements applicable to a company. It allows for the creation of bargaining councils to regulate minimum conditions of employment in various industries by way of collective bargaining. Agreements concluded in bargaining councils can also regulate the actual wage increases to be given. The first issue then is to understand whether the company is covered by bargaining council arrangements and bound by industry wide collective agreements. If not covered by a bargaining council, then the board should determine what other collective agreements are applicable, if any, and its ability to determine wage increases unilaterally. The legislation also covers the right to strike on the part of the employees and the right of the company to lock out. It covers the requirements for a fair dismissal as well as the requirements for fair conduct in relation to promotions, demotions and employment benefits. While most dismissals will not have material consequences for the company, a mass dismissal due to retrenchments or strike action can have material consequences for the company. The board would need to be informed regarding any such dismissal processes. The board would need to be aware of the requirements for a fair dismissal in the even that it seeks to terminate the employment of the CEO. [This will be dealt with in more detail in a later article]. The board will need to be aware that insofar as it exercises discretions in relation to variable pay that these may be subject to challenge under the unfair labour practice definition [Again this will be dealt with in more detail in a later article].
  • The Basic Conditions of Employment Act regulates the minimum terms and conditions of employment and deals with issues such as working hours, notice and leave. The board would only need assurances that this Act is being complied with.
  • The Employment Equity Act deals with the obligation not to discriminate against employees on listed grounds, including race, gender and religious belief. More importantly, it requires companies to implement employment equity policies to deal with the fair representation of various race groups, women and and persons with disabilities in the workplace. Non-compliance can have material consequences for the company, both from a reputational perspective as well as from the onerous fines that may be imposed. For this reason, the board needs to be informed on all aspects pertaining to the employment equity plan as well as how the company is performing against its targets. A mere assurance of compliance will not be sufficient given the consequences for the company of non-compliance. In addition, employment equity forms an important part of measuring compliance with BEE legislation and may impact the company’s ability to obtain work from both the public and private sectors.
  • Health and safety of employees can be a material issue depending on the nature of the industry that the company is engaged in. If the company is involved in heavy industry or mining where there are risks of injury or death to employees, then the board will need to pay particular attention to this issue. The death or serious injury of an employee can have material reputational risks for a company as well as the risk of work stoppages or closures of the plant.

It should also be noted that the Pension Fund Act has one provision that could result in personal liability for directors. A director ‘who is regularly involved in the management of the company’s overall financial affairs’ can be personally liable if the company fails to pay the pension fund contributions that are due in terms of the rules. The pension fund is obliged to request the company to identify such persons. If the company fails to do so, then all the directors become personally liable.

In conclusion, directors must take reasonably diligent steps to become informed about the employment legislation and regulations applicable to the company. They will do so by means of a proper delegation of authority to the CEO and responsible executive to identify the legislation and to keep the board informed of developments. Executives will be responsible for ensuring compliance and regularly advising the board regarding compliance. Particular attention should be paid to mass dismissals, the requirement and procedure required if the board contemplates the dismissal of the CEO, compliance with the Employment Equity Act and compliance with the Occupational Health and Safety Act in industries where employees may be exposed to hazardous working conditions.

All articles in the series: