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Workforce in a labour policy sweet spot

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The government has been good to Workforce Holdings, one of few labour brokers listed on the JSE.

What had seemed like a legislative assault on labour broking a few years ago has turned into a boon while the company is also using a windfall of labour subsidies to help fuel an acquisition drive.

Releasing Workforce’s annual financial results, newly appointed CEO Philip Froom said that the next wave of major labour policy changes would probably also be good for the company.

The imminent introduction of a national minimum wage will probably bring it more business and the much-hyped CEO Initiative involving Finance Minister Pravin Gordhan will likely drive demand for Workforce’s service in the provision of interns, investors were told at a presentation.

“We are busy with an analysis of the effect of a R20 per hour national minimum wage in our workforce,” Froom told City Press.

“It will not have a material impact on our contract base,” he added.

“We welcome the national minimum wage. It is an opportunity for us to consult our clients on the adjustment.”

It is similar to the amendments to the Labour Relations Act (LRA) in 2015 that introduced a controversial “deeming” provision whereby contract workers get entitled to equal benefits after three months and the labour broker and client assume joint liability to observing labour laws.

Founder, chairman and majority owner of Workforce Ronnie Katz said that Workforce “capitalised on [the LRA amendment] and it worked out well for us”.

The initial possibility of a ban on labour brokering sparked Workforce’s current strategy to build a services company on top of its labour hire business.

The group already offers microloans and has recently started offering other financial services like funeral policies and hospital plans.

“We were fearful of where labour legislation would go and started looking for parts of our business that are outside the labour broking field. Training is one, financial services is another,” said Katz.

The new financial services businesses in the Workforce Group include funeral policies, accidental death cover, medical cover and hospital plans.

The group has about 29 000 policies in this new business.

“We start organically within our contractor base, but the focus with the funeral and medical products is external as well,” said Froom.

Workforce’s internal microcredit unit only provides loans to its own contractors, reducing the risk of bad debts.

The loan book is “a good couple of hundred million, before provisions,” said Froom.

“We don’t offer this outside our contractor base, but people obviously leave and that is when you run into collection costs.”

Like other labour brokers, Workforce also benefits from the tax allowances attached to learnerships.

The group’s effective tax rate is 0% and has been for some time.

The company no longer reveals the extent of its subsidy thanks to the Employment Tax Incentive (ETI), but the last time it did, it came to over R50 million and accounted for all of its profits.

“The ETI is now a lower percentage relative to our earnings than it was in the past. We’ve just grown the business, so it is still a large absolute number,” Froom told City Press.

“We would be profitable without it,” he said.

“If the ETI gets cancelled [in 2019], we would like to think it would be replaced with something else.”

The group has profits of R92 million in 2016.

Workforce Holdings places an average of 32 000 contract workers at various clients in any given week. The majority of them fall in the demographic targeted by the ETI, otherwise known as the youth wage subsidy.

Katz told City Press that even though his company is receiving significant government subsidies, it is not as though this is just getting paid out in dividends. Instead, the company is investing its profits in an acquisition drive.

The industry is still very thinly spread out with market leaders like Workforce and larger peer Adcorp still controlling probably less than 10% put together.

The actual size of the labour brokering industry is, however, disputed, with estimates ranging from 650 000 to 1 million workers.

There is a structural barrier to scaling up a labour brokering business, said Froom.

A broker has to finance a large payroll and recoup this from clients after the fact.

This makes it a very “capital-intensive” industry, said Froom.

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