Mothership Explains: Who is exempt from paying local employees a local qualifying salary?

MS Explains: What is the Local Qualifying Salary and who doesn't need to pay it?

Jason Fan | September 10, 2021, 10:41 AM

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During 2021’s National Day Rally speech, Prime Minister Lee Hsien Loong announced a number of measures to improve the salaries of lower wage workers in Singapore.

Perhaps the most interesting announcement was this: Companies in Singapore that hire foreign workers will now be required to pay all their Singapore employees a Local Qualifying Salary (LQS) of at least S$1,400 a month, starting from Sep. 1, 2022.

For observers, the implication was immediately clear: Was Singapore finally about to introduce a form of minimum wage, after years of resisting the move?

How the LQS currently works

Before considering whether the new move means Singapore is inching closer towards a minimum wage, it is important to note that the LQS is not new.

In order to hire foreign workers in Singapore, companies must hire a certain number of local workers, due to foreign worker quotas.

The number of foreign staff a company can hire differs based on how many local staff they hire, and what industry they are in.

For example, the foreign worker quota in the services industry is 35 per cent of the company, while the foreign worker quota in the construction industry is a staggering 87.5 per cent, meaning you can hire seven Work Permit holders for every local employee (who earns the LQS).

In order to ensure that companies do not simply pay local employees a token sum of say, S$100 a month, to hire more foreign workers, local employees have to be paid a minimum LQS of S$1,400 a month, in order to be included in the local workers quota.

Any Singaporean or Permanent Resident (PR) will count as one local worker if they earn at least S$1,400, while an individual worker who earns between S$700 to S$1,399 counts as half a local worker.

Local workers that are paid below S$700 will not count towards the firm's local worker quota when it comes to hiring foreign workers.

The number of local workers needed to hire a foreign worker depends on a number of factors, such as which industry the company is in, and whether they are trying to hire S Pass or Work Permit holders.

Who will be exempt?

If you're a local worker who earns less than S$1,400, you're probably rejoicing right now, given that the new rules mean you're likely to be receiving a pay raise in the near future.

However, while most lower wage workers are expected to see their incomes increase due to the move, those who work for smaller local firms may not see the same increase.

This is because companies that do not hire any foreign workers will not need to pay their workers the LQS, meaning they remain free to pay their workers below S$1,400 a month.

Mothership clarified with MOM that this is indeed the only exception to the LQS; any firm that hires a foreign worker, whether it is an S Pass, Work Permit or Employment Pass (EP) holder will have to pay all their staff the prevailing LQS, once the changes kick in.

How many workers will not benefit?

According to MOM, the latest move to expand the Progressive Wage Model (PWM) to different sectors and change the LQS will cover 234,000 people, or about 82 per cent of full-time lower wage workers.

However, this means that 18 per cent of full-time lower wage workers, which are defined as the bottom 20th percentile of income earners in Singapore, will not benefit from the new changes.

The vast majority of these workers are employed by firms hiring fewer than 10 workers, and include small family operations such as hawker stalls and heartland shops.

It is important to note, however, that these workers may still see an indirect increase in wages, due to market competition.

After all, if most companies have to pay their workers at least S$1,400 a month (or more), it is more difficult for employers to pay their workers significantly less, if they do not want their workers to switch jobs in search for better pay.

Is Singapore progressing towards minimum wage?

Not likely.

While the Workers' Party (WP) has been calling for a minimum wage of S$1,300 for full-time work since 2020, the government has argued against it multiple times, preferring the Progressive Wage Model (PWM), which is a more targeted approach to lift salaries among lower wage workers.

While a minimum wage is fairly simple and universal, affecting all workers alike, the PWM is far more selective, mandating an income floor to only specific industries, provided the workers meet certain training requirements.

The PWM is currently in effect for the cleaning, security and landscaping industries.

In PM Lee's speech, apart from announcing the new changes to the LQS, he also mentioned that the PWM will be expanded to different sectors, such as retail and F&B, meaning that it is unlikely that the changes to the LQS is a move towards minimum wage in Singapore.

In fact, given that the PWM can be seen as the "replacement" of sorts to minimum wage in Singapore, the new changes likely mean that we are moving further away from a universal minimum wage.

Are the changes to the LQS all positive?

From the perspective of a lower wage employee, the new changes are likely to be overwhelmingly positive, given that they will enjoy better wages.

Of course, from the employer's point of view, the new announcement will mean extra wage costs, and PM Lee himself warned that Singaporeans may have to pay slightly higher prices in the future, in order to give lower wage workers better pay.

In addition, the new changes to the LQS may actually lead to a fall in local employment in certain situations.

This is because companies who currently hire local workers and pay them less than the LQS may be incentivised to retrench them instead of increasing their salaries, if they have not maximised their foreign worker quota.

For example, if Company A has five local workers that earn less than S$1,400, and the company has not hit the foreign worker quota yet, the company might be incentivised to simply hire more foreign workers, rather than increase the salary of the local workers to hit the LQS, depending on how much they earn in the first place.

While such a situation may be rare, it goes to show that there remain workarounds for companies who wish to minimise the impact on wage costs due to the new changes.

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Mothership Explains is a series where we dig deep into the important, interesting, and confusing going-ons in our world and try to, well, explain them.

This series aims to provide in-depth, easy-to-understand explanations to keep our readers up to date on not just what is going on in the world, but also the "why's".

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