When “Independent Contractors” are Actually Employees
It is an attractive idea for a business to use independent contractors instead of employees. The business does not have to comply with the stringent requirements of labour legislation such as the Labour Relations Act, the Basic Conditions of Employment Act, Employment Equity Act, Skills Development Levies Act, and the Unemployment Insurance Contributions Act.
Similarly, if one is a senior employee, it may seem smart to end the employment relationship, and instead deliver services as an independent contractor, or via your own company. The same rationale applies to many professionals – either current staff or imminent appointees. It is easily misunderstood that delivering services in this manner means that a person is now exempt from employees’ tax (PAYE) and UIF contributions.
However, such a restructuring is not nearly as simple as it seems; both from a labour law and tax perspective. This article will focus on the former.
When is someone an independent contractor?
The law is clear: just because you call a donkey a horse, doesn’t mean that the donkey is a horse. The mere fact that a person is called an independent contractor, does not make them one. The relationship will be evaluated on substance rather than form.
The courts have developed various tests to determine whether a person is actually an independent contractor, with the “dominant impression” test being the preferred one.
This test takes into account various factors to determine whether a person is an employee, or an independent contractor by focusing on the dominant impression.
The primary factors that a court will consider, are the following:
- the employer’s right of supervision and control;
- whether the worker forms an integral part of the organisation; and
- the worker’s economic dependency on the employer.
Other factors that may also be taken into account, include:
- whether the worker is allowed to work for another employer;
- whether the worker is paid according to a fixed rate or commission;
- whether the worker provides their own tools and equipment;
- whether the worker is required to devote a specific time to their work; and
- whether the worker is obliged to perform their duties personally.
When weighing up all the factors, a qualitative rather than quantitative approach is adopted. Each case will differ, and certain factors will be given more weight when determining the nature of a particular relationship than others.
Furthermore, it is crucial to note that just because Company A contracts some of its services to Company B, it does not necessarily mean that Company A is not employing a person from Company B. The following decision in the Labour Appeal Court demonstrates that the owner of a company may still be found to be the employee of another entity. In Denel (Pty) Ltd v Gerber [2005] BLLR 849 (LAC), Ms Gerber did not enter into a direct contractual relationship with Denel. The contract to provide certain services to Denel was entered into between Denel and a company of which she was a director and shareholder. The Labour Appeal Court said that in deciding whether a person is the employee of another or not, it must determine the true, real position, which should not be decided solely on the basis of what the parties choose to say in their agreement. Based on the content of the contracts and the way Denel and Ms Gerber interacted with each other, the Court held that Ms Gerber was indeed an employee of Denel.
The Labour Appeal Court’s conclusion was informed, inter alia, by the following factors:
- Ms Gerber was initially recruited as an employee before concluding a contract in which her services where purportedly rendered through a separate company;
- the parties both understood that Ms Gerber would render the services alone;
- in terms of the contract, Ms Gerber was to render the services during Denel’s normal working hours;
- Ms Gerber was paid at a fixed hourly rate;
- Denel provided her with office and facilities;
- Ms Gerber was subject to Denel’s disciplinary and grievance procedures; and
- Denel controlled where and when Ms Gerber worked.
The key lesson
Businesses should be careful in thinking that they do not have to comply with labour legislation just because they have now contracted a worker as an independent contractor instead of as an employee, or have contracted the worker indirectly through a company intermediary. When it comes down to it, the law may still deem the worker to be an employee of the business, and the business will be liable for any non-compliance with labour laws.
Tax implications
Aside from the labour law complications, it is extremely important for business owners to note that the South African Revenue Service (SARS) may also deem an “independent contractor” to actually be an employee (or, if the services are sub-contracted to a company, for that other company to be what is called a “personal service provider”). In both instances, the employer must deduct or withhold employees’ tax, and will be liable to SARS for outstanding PAYE/ UIF contributions.
Conclusion
It is therefore recommended to consult a legal practitioner to assess the position of your business vis-à-vis all the workers, and to consult a tax practitioner to ensure that your business will not be held liable for outstanding employees’ taxes due to SARS.
A properly structured legal agreement between the worker and business can make all the difference. A court is more likely to recognise the worker as an independent contractor if the contract accurately reflects the nature of the independent contractor relationship, the worker is in a sufficiently strong bargaining position to influence the rate of remuneration, and the parties deliberately structure their relationship as something other than employment.
Bibliography:
Books
Garbers, C. and Le Roux, P. A. K. The New Essential Labour Law Handbook. Ed. by E. M. L. Strydom. Seventh edition. Centurion: South Africa: MACE Labour Law Publications CC, 2019.
Du Toit, D. Labour Relations Law: A Comprehensive Guide. Seventh edition. Durban: LexisNexis, 2023.
Written by:
Jani Knoetze | Candidate Legal Practitioner
DKVG Attorneys | Bellville
Email: Jknoetze@dkvg.co.za
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.