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The Challenge of Determining Earnings Loss for Self-Employed Individuals...

Updated: Nov 2, 2023

The Challenge of Determining Earnings Loss for Self-Employed Individuals in South Africa's Informal Sector: An Industrial Psychologist's Perspective


By Caren Swanepoel, Gideon Heyns and Valeske Kelly, Managing Director and Directors of CSIP (Caren Swanepoel Industrial Psychologists), CSIP Heyns and CSIP Kelly. CSIP may be contacted on 067 930 5709 or admin@csip.co.za. Visit our website: https://csip.co.za/. Linkedin: https://www.linkedin.com/pulse/challenge-determining-earnings-loss-self-employed/


Introduction


South Africa's informal sector plays a crucial role in the country's economy, providing employment opportunities and contributing to economic growth. However, when it comes to assessing earnings loss for self-employed individuals in this sector, Industrial Psychologists face unique challenges. This article delves into the complexities surrounding the determination of earnings loss for self-employed individuals in South Africa's informal sector and the importance of collateral information.


The South African Informal Sector


South Africa's informal sector comprises a diverse range of income-generating activities, from street vending and small-scale agriculture to home-based businesses and service provision. Many individuals in this sector operate without formal registration or adherence to labour laws. This informal nature of work poses significant challenges when attempting to assess and determine a loss of earnings for self-employed workers/individuals.


For instance, a street vendor may not have consistent income streams due to the fluctuating nature of the informal sector, and limited resources, while a small-scale manufacturer, such as an informal construction business, may rely on a variety of skills and resources, which makes it challenging to quantify earnings with certainty. This diversity makes it hard to establish a one-size-fits-all approach to calculating earnings loss. Without accurate records, estimating earnings loss relies heavily on self-reported data, which can be inconsistent, unreliable, and prone to biases. This, in turn, affects the precision of assessments and can lead to disputes when determining compensation for losses.


Challenges in Determining Earnings Loss


  1. Lack of Formal Documentation or Financial Records: One of the primary challenges faced by industrial psychologists is the absence of formal documentation in the informal sector. Unlike formal employment where income is often recorded through payslips and tax documents, many self-employed individuals in the informal sector operate in a cash-based economy, making it difficult to accurately track their earnings whether it be via financial records, invoices or bank statements.

  2. Inconsistent Income Streams: Self-employed individuals in the informal sector often experience irregular income streams. Earnings often vary significantly from one month to another, as such earnings are dependent upon various factors such as the sustainability of the entity/type of work, competition, seasonal cyclical demands, specific expenditures relating to operating a business of this nature, the incumbent’s health, availability of products & resources, wages, transport, etc., thus making it challenging to establish a consistent baseline for assessing earnings loss.

  3. Underreporting of Income: Some self-employed individuals in the informal sector may underreport their income to evade taxes or maintain eligibility for social benefits. This makes it challenging to obtain accurate data for earnings loss calculations. As such, Industrial Psychologists will have to delve deep into the specific nature of the business, weighing up income versus expenses, in an attempt to accurately quantify personal profits.

  4. Economic Vulnerabilities: The informal sector is highly susceptible to economic fluctuations, external forces, and seasonality. These factors can lead to considerable variations in earnings and make it difficult to determine a stable benchmark for calculating earnings loss, which Industrial Psychologists must take into consideration in their assessments and reports

  5. Informal Labour Practices: Informal sector workers often operate in environments where labour practices, including working hours and compensation, are loosely regulated or entirely unregulated. This lack of structure adds complexity to assessing earnings loss.

  6. The Intangibility of Human Capital: Industrial Psychologists recognize that human capital is a vital component of earnings potential. In the formal sector, it is easier to quantify this capital through educational credentials, work experience, different work sectors and skill assessments. However, in the informal sector, the intangibility of human capital complicates matters. Many self-employed individuals in South Africa's informal sector acquire skills and experience through non-formal means, such as apprenticeships or learning on the job. These skills, while invaluable, are challenging to measure objectively. This lack of clear metrics for human capital development makes it difficult to ascertain how earnings loss impacts an individual's overall earnings capacity and potential.


The Importance of Collateral Information


Collateral information refers to supplementary data and context that Industrial Psychologists gather to enhance the accuracy and reliability of earnings loss assessments. In the case of self-employed individuals in the informal sector, collateral information plays a pivotal role.


  • External sources, such as community leaders, local authorities, work colleagues and customer testimonials, can help verify income claims and provide a more accurate picture of earnings in the form of a confirmatory affidavit or confirmation of employment letter

  • Collateral information can shed light on the nature of business of the individual, frequency of business/projects, resources required and expenditure which can be compared to reported income levels. This comparison can help detect discrepancies and inconsistencies that may be indicative of unreported income or underreporting/overreporting.

  • Collateral information should be cross-checked and verified to ensure its accuracy and reliability. Multiple sources should corroborate the same details whenever possible.

  • Collateral information can be subjective and open to interpretation. Industrial Psychologists must exercise caution in drawing conclusions based solely on this information and use it to complement other data sources such as occupation/labour-specific earnings research.


Industrial Psychologists and legal practitioners can play a role in promoting better financial record-keeping practices within the informal sector. By educating and encouraging self-employed individuals to maintain better financial documentation, the accuracy of earnings loss assessments can be improved in the long term.


Assessing earnings loss for self-employed individuals in South Africa's informal sector is a challenging task for Industrial Psychologists. The sector's informal nature, irregular income patterns, and limited documentation pose unique obstacles. Hence, collateral information, comprising supplementary data and context, plays a pivotal role in enhancing the accuracy and reliability of these assessments. By embracing collateral information and understanding its significance, Industrial Psychologists can contribute to a more comprehensive and equitable assessment of earnings loss in this vital segment of the economy.

CSIP (Caren Swanepoel Industrial Psychologists)


The opinions expressed in this article are the author’s own and do not necessarily reflect the view of Lexinfo CC.


Posted: 3 October 2023



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