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Labour Law

Independent Contractors

By 29/08/2009 No Comments

Section 213 (f) of the Labour Relations Act 66 of 1995 defines an employee as:

“(a) any person, excluding an independent contractor who works for another person or for the state and who receives, or is entitled to receive and remuneration; and

(b) any other person who in any manner assists in carrying on or conducting the business of an employer

The exclusion of independent contractors from this definition is of paramount importance as persons who are not employees as defined, are effectively excluded from the protection afforded by the Act. A person who is considered an independent contractor therefore has no recourse for unfair dismissal etc.

This exclusion of independent contractors from the Act has led to many employers hiring staff as contractors in order to try and circumvent the provisions of the Act.

The question of whether a person is a contractor or an employee poses a fundamental jurisdictional problem when a dispute is referred under the Labour Relations Act. As such is it a question of law which the Courts (or other bodies e.g. the CCMA) have to decide on before a matter may proceed.

Several recent cases which dealt with this issue are Niselow v Liberty Life Association of Africa (1998) 19 ILJ 752 (SCA); SABC v McKenzie (1999) 20 ILJ 585 (LAC) and Dempsey v Home & Property (1995) 16 ILJ 378 (LAC)

The test of the employment relationship should begin with the actual contract of employment. However in the SABC case it was said that the parties own perceptions of the employment relationship should be taken into account as well as the manner in which the contract is carried out.

The following factors appear to be the most important and provide the bases for several aspects of an employment relationship:

  • The dominant impression
  • Productive capacity
  • Control

The Dominant Impression test.

This test was applied in Dempsey. No single factor is considered determinative on its own but the employment relationship is examined in its totality. Factors which indicate an employment relationship must be weighed against factors which indicate a contractor relationship and the dominant impression must be determined.

The most important factors which will be taken into account are:

* Supervision and control – These are probably the most important and the greater the degree of control, the more probable that the relationship is one of employer / employee.

* Degree of autonomy – The independent contractor has far more autonomy in his daily tasks as the relationship is focused on the end result and not the manner in which it is accomplished. In Dempsey’s case, it was however held that a contractor may be required to maintain a certain level of ethics.

* Results versus time – An employee is usually required to devote a certain amount of time to the employer. He gets paid for this time whether or not there is work to be performed. A contractor will generally not be tied down to specific hours as long as the desired result is obtained.

* Commission versus salary – linked to the result / time consideration, the Court will also look at how payment was effected. Commission rewards a result while salary rewards time and therefore commission tends to indicate a contractor relationship while a salary or wage tends to indicate an employee relationship. This test is however not rigidly applied.

* Benefits – The Court may also take into account whether the “employee” receives benefits such as sick leave, medical aid, car allowance, etc. These are more indicative of an employment relationship but are also not totally incompatible with a contractor relationship.

It must be stressed that when applying the dominant impression test, the Court will take into account all the elements of each type of relationship that exist in each specific case. Thus the test is by nature subjective and each set of facts will be judged on its own merits.

The Productive Capacity test

This test was used in Niselow and consisted mainly of determining whether or not the “employee” put his productive capacity at the disposal of the “employer”. It is similar to the results versus time factor which was considered under the Dominant impression test above.

In this test, the Court will examine who actually controls the employees productive capacity. In an independent contractor situation, the contractor can decide how he is going to accomplish the work and usually may hire other staff to assist with this. As long as certain basic requirements / standards are complied with, he can use his own methods to complete his tasks.

In an employer / employee situation however, the employer controls the employees productive capacity and usually has the final say over how, when and what must be accomplished. The employees production is for the benefit of the employer.

In this situation, the employer has to remunerate the employee whether or not work has been provided, as long as the employer has had the benefit of the employees productive capacity.

This test is of extreme importance, as it has been endorsed by the Supreme Court of Appeal.

Control

This is the traditional ground for determining the true nature of a work relationship. It was held in McKenzie that control is one of the most important aspects of an employment relationship. Although it is not decisive, the greater the degree of control, the greater the probability of an employment relationship.

Problematic cases: an example

A trend appears to be emerging in which employees who wish to pay less tax, enter into a Consultancy agreement with an employer and provide invoices for services rendered, consulting fees or similar. The employee then pays VAT as opposed to income tax.

This set up came before the Court in the matters of CMS Support Services (Pty.) LTD v Briggs (1998) 19 ILJ 271 (LAC) and Hunt v ICC Car Importers Co (Pty.) LTD (1999) 20 ILJ 364 (LC). Although these cases were quite different, several important principles were applied.

Without going into excessive detail, it is interesting to note that the Court will not consider itself bound to what the parties have purported to contract between themselves but will examine the true nature of the relationship. For example, in the Hunt case, the Labour Court found that the system of providing invoices was a sham intended to deceive the revenue services. The Court found that although the employee was paid on presentation of invoices, the relationship between the parties was nevertheless one of employment.

The Court in Briggs however found that the parties had in fact entered into a consultancy agreement. In this case an employment relationship had previously existed between the parties who had mutually decided to rather enter into a consultancy arrangement. The Court enforced this contract and found that no employment relationship existed.

The Court has also made it clear that parties should not be able to disguise their relationship to avoid certain consequences (e.g. paying income tax) and then revert to employee status when this is suitable. In this regard a copy of the judgement in Hunt was forwarded to the receiver of revenue (as he then was ) .

Ian Mc Laren

Ian Mc Laren

Ian McLaren BA LLB (WITS) General Educated St Johns College, Houghton. BA LLB University of the Witwatersrand 1984 Founded McLarens Attorneys September 1986. Right of Appearance High Court, October 1996. Expertise Litigation, Labour Law, Commercial Law, Family Law, Pension and Provident Funds, Customs and Excise, Wills, Deceased Estates, Trusts, Commercial Agreements, Reviewing and Drafting Government Legislation, Information Technology. Committees/ Trusts Law Society of South Africa Information Technology Committee. Trustee Verney College Educational Trust Other Transvaal Provincial colours for Practical Shooting. Third degree Black Belt JKS Karate. Photographer and motor cyclist Lectured for Continuing Legal Education on Information Technology issues.