The Unfortunate Risk of Non-Compliance with the Legal Sector Code by Previously Exempted Law Firms

1. Introduction

The B-BBEE Legal Sector Code, gazetted in 2024 by the Minister of Trade, Industry, and Competition under the Broad-Based Black Economic Empowerment Act, No.53 of 2003, aims to address historical inequalities within the legal profession and promote a more equitable and inclusive sector.  A key deviation from other sector codes is the lack of a transition period for law firms that were previously below the threshold requiring formal B-BBEE verification. This may have the unintended consequence of disadvantaging the very firms that the Legal Sector Code aims to empower.

2. Background on QSEs and the Legal Sector Code

Under the Amended Codes of Good Practice, Qualifying Small Enterprises (QSEs) (i.e., firms with an annual turnover between R10 million and R50 million ) were deemed to have a Level 4 B-BBEE status and exempt from verification unless seeking enhanced recognition. QSEs that are 100% black-owned are automatically assigned a Level 1 B-BBEE rating, while those with at least 51% black ownership automatically receive a Level 2 rating. QSEs that are not black owned must be measured in terms of the QSE scorecard (i.e. measured for compliance with ownership, management control, skills development, enterprise and supplier development, and socio-economic development).

Under the Legal Sector Code, QSEs are defined as law firms with an annual turnover of between R5 million and R25 million. A black-owned QSE is only required to obtain a sworn affidavit on an annual basis confirming its total annual turnover and level of black ownership. On the other hand, QSEs that are not black owned must be measured in terms of the QSE scorecard (i.e. measured for compliance with Ownership as a compulsory element and either Skills Development or Enterprise and Supplier Development). 

A B-BBEE compliant QSE can access new markets and opportunities, in particular they can enjoy more preferential treatment and access to tender, contracts, and licenses in the public sector and with large corporates that prefer to do business with B-BBEE compliant entities. They can also gain a competitive edge and differentiation in the market over their competitors and attract more customers, investors, and partners. 

However, B-BBEE compliant QSEs face more competition and pressure than Large Enterprises as they have to compete with other QSEs for the same market share and opportunities, while also meeting the expectations and requirements of Large Enterprises that are their customers or suppliers. QSEs also have to balance the trade-offs and risks of increasing or decreasing their turnover, which can affect their B-BBEE status and rating.

Under the Amended Codes of Good Practice, when a QSE transitions to a Large Enterprise due to exceeding the R25 million annual turnover threshold, a transition period is typically observed. This allows the company to adjust its B-BBEE strategy and implementation in alignment with the new generic scorecard. Notably, in most sectors such as the ICT and Construction Sector Codes, a QSE that transitions into the Large Enterprise category is afforded a 12-month grace period during which they may choose to be measured against either the QSE or Generic Scorecard. This approach allows the enterprise to progressively align its internal systems, initiate equity partnerships, and build the requisite supply chain relationships without being penalised for crossing the turnover threshold.

By way of example, the Financial Sector Code, which was implemented on January 1, 2004, included a transition period which allowed for a gradual integration of the new code and a more structured approach to the implementation of the "Access to Financial Services Element" (i.e., making financial products and services accessible to previously underserved individuals and black-owned businesses). During the transition period, entities were required to report their B-BBEE compliance based on the scorecard and principles of the Financial Sector Code, but without the Access Standards. The Financial Sector Code was then amended and revised, and the amended version, which was published in 2017, did not include a transitional period in order to facilitate rapid transformation in the financial sector, particularly in areas like black ownership and management control. 

However, the Legal Sector Code was implemented without a transitional period, meaning law firms were required to comply with the new rules immediately from the effective date. Any B-BBEE certificates issued for the legal sector on or after September 20, 2024, must be in accordance with the Legal Sector Code. 

3. Sudden Compliance Burden for Growing Black Owned QSEs 

Medium sized black owned law firms that recently crossed the R25 million annual turnover threshold and transitioned from QSEs to Large Enterprises are particularly affected. These firms are now required to comply with all the Priority Elements (i.e., Ownership, Skills Development and Enterprise and Supplier Development)—without any transitional leeway. Many such entities may have been preparing for long-term compliance as QSEs but now face an abrupt shift with heightened obligations and no phase-in period. This creates uncertainty and potential non-compliance risk, despite otherwise their ownership credentials being unchanged.

For example, a medium-sized law firm that had consistently reported R22 million in turnover for three years may suddenly exceed the R25 million threshold due to a major public-sector litigation contract. Despite their good faith efforts under the QSE framework—such as initiating mentorship and procurement partnerships—they are now abruptly subject to generic scorecard requirements, including a skills development target of 3.5% expenditure on training programs for black candidate practitioners. The absence of a transition period prevents them from restructuring in a sustainable, compliant manner.

Despite black ownership, most of these firms do not yet have corporate-scale revenue stability. As such, they have not yet planned and budgeted to pay for formal B-BBEE verification, track and report on the Legal Sector Code -specific targets and invest in skills development and Enterprise and Supplier Development projects. This could divert limited resources away from growth and legal service delivery and may open them up to, inter alia, reputational risk, credibility concerns and disqualification from government tenders. 

A black-owned firm that previously relied on automatic Level 1 or Level 2 status may now appear non-compliant or receive a lower score if it hasn’t rapidly adjusted to the new rules. This may disqualify or disadvantage firms in high-value tenders—even if they're 100% black-owned. This removes a key incentive and ironically disadvantages the very firms the Legal Sector Code aims to empower.

Clients may not understand why a historically Level 1 firm is now Level 3 or 4, leading to credibility concerns. Firms could lose business relationships based on misinterpretation of compliance status, despite their ownership credentials being unchanged. Black-owned QSEs that grew organically are success stories of B-BBEE policy. Penalizing them during growth discourages black ownership and contradicts transformation objectives. 

To mitigate these risks, introducing an automatic Level 1 status retention for 100% black-owned QSEs for the 12-18 months transitional period could ensure that these QSEs continue to enjoy preferential treatment and access to tenders in the public and private sectors. This would prevent commercial exclusion during the adjustment phase and ensure that growth is rewarded, not punished. 

This Level 1 status retention could apply to QSEs with a turnover between R25–R45 million and they would be required to submit a sworn affidavit affirming ownership and turnover history and a credible transition plan for full compliance with the generic scorecard by the end of the transitional period. 

This 12–18 month transition for newly transitioned black owned Large Enterprises would allow:

• Budgeting and planning;
• Ownership restructuring;
• Relationship-building with black-owned suppliers and Enterprise and Supplier Development beneficiaries; and
• Sustainable long-term transformation instead of last-minute box-ticking.

Failure to comply with the generic scorecard by the end of the transitional period would lead to forfeiture of transitional Level 1 status and will result in the discounting of their B-BBEE status level. However, the firms may apply for a short extension (up to 6 months) with motivation, evidence of steps taken, and/or verifiable delays (e.g., verification agency backlog). Failure to meet even the extended period will result in automatic enforcement of the discounting of their B-BBEE status level.

4. Conclusion

While the Legal Sector Code marks a significant step toward inclusive transformation in the legal profession, it did not properly account for the operational realities of growing businesses like black owned QSEs that recently transitioned from QSEs to Large Enterprises. The Legal Sector Code still requires further clarification to ensure smooth implementation for legal practitioners and law firms. It remains to be seen whether the Legal Sector Charter Council will provide much-needed clarity and guidance.

References:

• Legal Sector Code as published on 20 September 2024
• Amended Broad-Based Black Economic Empowerment Act, No.46 of 2013