Minimum wage or maximum earnings?

Minimum wage or maximum earnings?

MAIN IMAGE: Kevin Mullins, CEO of the South African Real Estate Academy.

Kevin Mullins

The real estate industry is facing a perfect storm with the imminent convergence of both the National Minimum Wage Act and the soon-to-be-promulgated Property Practitioners’ Act.

These new laws will introduce a legislative regime that will be a game-changer. Property practitioners, in particular business owners, should prepare for the inevitable impact that will occur when both of these Acts are fully implemented.

Because we are not sure of the final form of the regulations that must be made by the Minister of Human Settlement in respect of the Property Practitioners’ Act, this article will focus on the National Minimum Wage Act, its effect on the sector and measures that can be implemented to avoid negative fallout.

In 2014 I wrote an article on intern estate agent engagement that was provided to both the EAAB and Services Seta. Unfortunately, this article never saw the light of day, possibly because it was too far ahead of its time. In the article, I discussed the recruitment and contracting of intern estate agents and possible remuneration structures that departed from the traditional “commission-only” model that is almost universally implemented in the industry in this country. The intention of the article was to generate discussion around best practices for intern engagement, but the ideas put forward can equally be presented in the light of the prospect of minimum wages having to be paid to all employed agents.

Recruitment and contracting

The recent article Industry reacts to minimum wage (29 August 2019) explored the question of whether or not business owners were paying sufficient attention to the recruitment of intern estate agents. The answer, in general, is an unequivocal “No!”.

It is not a case that business owners are delinquent in recruiting intern (or for that matter any) estate agents. The practice has evolved from the reality that a bad recruitment decision in respect of an estate agent carries much lower financial consequences than in most other industries. This is so because of the “commission-only” model, where the failure of the agent after a number of months (or years) is not accompanied by the wasted costs of the salary that would have been paid during this period in a more traditional remuneration model. As a result, business owners are more likely to indulge a “hit-or-miss” approach to recruitment of agents. If 50% of recruited agents become above-average producers and the other half fall out of the industry, then this is seen as acceptable.

Now, consider the acceptability of a situation where one would be bound, by law, to pay all recruits a minimum wage of R3,500 per month and half of these will never provide any return. That doesn’t seem like such a good deal does it? But this is exactly what faces the industry in the light of the National Minimum Wage Act. So, where to from here?

“What is clear is that more attention will have to be paid to selecting the right person for the job. The “hit-and-miss” approach just won’t cut it anymore.”

The 2014 article explored the recruitment, contracting, remuneration and retention of intern estate agents, but the concepts discussed are applicable to any category of property practitioner. What is clear is that more attention will have to be paid to selecting the right person for the job. The “hit-and-miss” approach just won’t cut it anymore. What is also abundantly clear is that business owners will no longer be able to abdicate their responsibility for qualification of agents and will have to play a more active role in training these agents to ensure their development into productive assets. This will entail investment of both time and money, two commodities that may be in short supply. It will be necessary to reinvent the real estate remuneration model to strike a balance between what is fair to the agent and what is fair to the business owner.

That brings us to the contract of employment. In the 2014 article I wrote:

“The common law principle pacta sunt servanda applies to any agreement entered into by parties of their own free will. Often referred to as “freedom of contract”, this principle dictates that such contracts will be enforceable, no matter what the terms. However, the Constitution provides that the common law must be developed to reflect principles such as fairness and the common good (the word “Ubuntu” is used). The Constitutional Court has been vocal in recent judgments on the issue of developing the pacta sunt servanda principle to reflect such fairness. It is advisable, therefore, to construct the intern [and full-status agent] employment agreement in a manner that is fair to both parties to avoid potential legal disputes down the line.”

The above extract provides the grounds for moving away from the traditional commission-only model to a more equitable model for both parties. Such a model is not a liberal elective, but a legislative imperative when the National Minimum Wage Act finds traction in the real estate industry.

Productivity and return on investment

Let’s assume, for the purpose of argument, that every real estate agent will be entitled to a minimum wage of R3,500 per month, irrespective of productivity and results. There are a number of potential options available to business owners. Firstly, do a spring-clean and get rid of all non-producing agents. Whilst this may look like a viable option, the danger lurks in the prospect of unfair dismissal proceedings at the CCMA or Labour Court. Secondly, put all agents on “independent contractor” status. Once again, this may not be useful because the courts have held that the relationship between principal and estate agent is that of employer and employee, not principal and independent contractor. So, it doesn’t matter what form the contract takes, the substance of the contract determines that the agent is an employee. Further to this, the National Minimum Wage Act does not use the term “employee” in relation to its application. It uses the term “worker” which is far broader and is certainly applicable to estate agents. The third, and in my opinion only viable option, is to adjust the employment contract in terms of the remuneration structure.

“The third, and in my opinion only viable option, is to adjust the employment contract in terms of the remuneration structure.”

Interns. As far as intern agents are concerned, the minimum wage of R3,500 per month will force business owners to be more circumspect about both the number and quality of persons recruited. Another consideration is how to move the new recruit from non-producer to producer as quickly as possible. The answer lies in comprehensive training and mentoring.

Unfortunately, the industry has, in general, been guilty of taking short cuts in the abovementioned area by allowing interns to obtain the mandatory NQF4 qualification through recognition of prior learning (“RPL”) rather than full training and providing little mentoring support along the way. Typically a new intern is advised to work for 12 months during which time they complete the EAAB intern logbook, supposedly under the guidance of their mentor, and then complete the NQF4 qualification via RPL. The problem is that where the intern receives little or no mentorship, there is no actual learning taking place. By then allowing the intern to undertake the RPL process that was designed to facilitate the qualification of pre-2008 full-status agents, they become “qualified” yet still lack the knowledge and skills required to sustain themselves in a competitive market and contribute to the earnings of the firm. This is not a major problem in a commission-only model because the business owner has invested very little in the intern and when they fall out of the industry, not much is lost.

Now let’s change the stakes. The same intern is advised to undertake the same route to qualification. During the first 12 months, the business owner will invest at least R42,000 in that person in minimum wages alone. Add to this the estimated cost-to-company of R8,000 per intern per month, then the picture looks even more ominous with a potential investment of R140,000 per intern per annum. Most interns do not really produce commission earnings during this initial year, so if they subsequently fall out of the industry, this investment is lost. The longer the intern remains unproductive, the greater the financial risk, hence the need for reinventing the remuneration model.

“There is no reason why an intern should wait 12 months before starting the qualification process. Full training towards the NQF4 can and should be commenced as soon after the intern is recruited as possible.”

Shortening the time from take-on to the intern becoming productive is key, as is retention of an intern beyond the internship in order to recover a return on investment. Productivity is a function of knowledge and skills, so the sooner an intern completes the qualification, the better for the business owner. There is no reason why an intern should wait 12 months before starting the qualification process. Full training towards the NQF4 can and should be commenced as soon after the intern is recruited as possible. Armed with the knowledge and skills acquired through the training, backed by meaningful mentorship, the intern has a far greater prospect of becoming productive within the first 12 months.

Remuneration structure

It speaks for itself that a new recruit cannot earn what a qualified estate agent earns. In a 50/50 commission split model, an intern should be placed on a lower tier than a full-status agent. By doing this, the business owner will provide an incentive for the intern to qualify and also facilitate the opportunity to recover the amount invested as soon as possible.

In the 2014 article, I proposed a revamped remuneration model for interns based on a minimum wage as follows:

“This approach is a radical departure from traditional real estate employment models but has been implemented with initial success by at least one particular commercial/industrial agency. The rationale is to provide the intern with sufficient earnings for a six month period, so that they can sustain themselves while undergoing training and establishing themselves in the market.

The intern is paid a basic monthly amount as a “loan” from the firm. This loan is repaid from commission earnings as they become available, until the entire debt is recovered by the company. The cost of intern training is added to the loan by the particular firm in question.”

An intern should be engaged on a 12-month fixed term contract, renewable at the discretion of the business owner and with a three-month probation period built into it. Various milestones will be set out for achievement by the intern if he/she is to be retained by the firm. Amongst these will be the achievement of the NQF4 qualification within the 12-month contract period.

A proposed remuneration structure was also put forward in the 2014 article:

“Due to the fact that an intern agent is not qualified to offer full estate agency services, he/she should not be entitled to earn the same commission as a qualified full-status agent. Provision also needs to be made for remunerating the agent that is assigned to mentor the intern, for his/her time and effort. Although there is no standard remuneration structure, the following commission split is recommended for traditional (50/50) agencies:

50% to firm

40% to intern

10% to mentor

The amount payable to the mentor reduces to 5% and that payable to the intern increases to 45% once the intern completes the internship training program. The mentor ceases to earn any commission once the intern obtains upgrade to full status.

However, it must be borne in mind that the abovementioned article was written before the effective date of the National Minimum Wage Act. It may be prudent, in the light of having to pay interns a minimum wage, to reduce their potential commission split to 30% so that the wage (in the form of a loan) is recoverable quicker by the firm at a rate of 60% of any commission earned by the intern whilst still at that status.

Conclusion

The real estate industry is at a crossroads as far as remuneration models are concerned. This article explores some options as a means of starting a dialogue, but it does not provide all of the answers. Business owners are urged to engage with REBOSA, their accountants and their legal advisors to craft a solution that will work for them.

Ends.

About the author: Formerly an HR professional and property practitioner, Kevin is currently CEO of the South African Real Estate Academy (SAREA), an accredited provider of the mandatory real estate qualifications, as well as a practising advocate.

Showing 4 comments
  • Mark Jones
    Reply

    Whilst the implementation of minimum wage may well be a reality that the industry needs to deal with it in all probability further impact on the reluctance of many business owners to engage interns at all. I would like to comment on the popular misconception that guides the “hit and miss approach” and the narrative that under performing agents dont cost principals much because they are on a “commision only” remuneration structure. Many principals themselves (except perhaps those who have true independent contractor contracts in place) have unfortunately never accuarately quantified the cost of an agent. When all factors such as office space,advertsisng costs, personal marketing support and material, phones, web portal costs etc are taken into consideration a minumum cost of R 10,000 per month is not inconceivable. There is also a very subtle, unquantifiable and seldom considered cost that for want of a better word lets call opportunity cost. That is the cost incurred when an intern can not maximise opportunties such as a listing or maybe a buyer because their closing rate and relationship building skills can never match that of an experienced agent. If that occurs six times a year for example that is in fcat a cost of hundreds of thousands in lost revenue. In a market of limited opportunites why would a principal expose himself to such risk. A radical mindset change is required. When you enter the real estate industry you are not taking a job or starting a career you are opening a business. Even if you are associated with a principal you are in business for yourself just not by yourself. We need entrepeneurs not employees. As an entrepeneur what investment are you prepared to make in starting up your business. If you want to enter this business you need to come with capital and pay a principal for his mentorship, his brand or at least pay for your costs. Where in the world do you get to start a business at someone else’s risk. Food for thought.

    • Kevin Mullins
      Reply

      I agree 100% with you, thus the cautionary note on retention strategies.

  • Blenn
    Reply

    This will have a hugely negative effect on the establishment of small agencies and the resultant employment opportunities. How on earth can a small entrepreneur afford to carry even one, let alone several interns, for at least 12 months?
    The big boys must be rubbing their hands together!!

    • Kevin Mullins
      Reply

      Currently agencies earning below R2.5 million commission p.a. constitute more than 70% of agencies registered with EAAB, so it is essential to preserve these practitioners. Perhaps a Sectoral Determination can be obtained from the Minister to exempt the industry from the minimum wage?

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