When do independent contractors become employees?

May 23, 2011

Articles

The term ‘employee’ is defined in both the Labour Relations Act of 1995, the Basic
Conditions of Employment Act of 1997 and other labour related legislation. However,
the term ‘independent contractors’ is not defined in any legislation. In general terms,
an independent contractor is someone who independently renders specified services,
or produces specified products or results, to a number of clients. Essentially, it is
someone who runs a business of one sort or another.

It is critical to distinguish between employees and independent contractors since:

  • Only employees are protected by the provisions of the LRA, BCEA and other
    labour related legislation against, for example, unfair dismissal, unfair
    discrimination and exploitation. This means, amongst others, that whereas the
    contract with an independent contractor can be ended as provided for in the
    contract between the parties, employees can only be dismissed if the
    substantive and procedural requirements for a fair dismissal have been met;
  • Also, only employees are entitled to the basic conditions of employment as
    stipulated in the BCEA, e.g., annual leave, sick leave and maternity leave, while
    the deduction of UIF, and the corresponding pay-over to the Department of
    Labour, is also only relevant to employees;
  • Employers of employees are liable for any unlawful acts committed by their
    employees in the course and scope of their duties (e.g., accidents that injure
    others) whereas no such liability rests in respect of actions of independent
    contractors;
  • While employers are obligated to deduct income tax from the remuneration of
    their employees, true independent contractors are responsible to personally pay
    their own income tax directly to the SARS.

Whether a person is truly an independent contractor, as opposed to an employee,
would depend on the circumstances and facts of a specific relationship. S 200A of
the LRA and s 83A of the BCEA provides a list of factors which, if any one or more of
the factors are present in any specific relationship, creates a presumption, until the
contrary is proved by the employer, that the person rendering services is in fact an
employee. The presumption is only applicable to individuals who are not part of
senior management (i.e., cannot hire and fire) and earn less than the earnings
threshold, which is currently set at R 149 736.00. Where a person earns in excess of
the earnings threshold, or is a senior manager, the factors listed in the sections
nevertheless, remain relevant and should still be considered in determining the true
status of the work relationship created between the parties, although no automatic
presumption will be created.

In the case of a person earning less than the earnings threshold, and who does not
form part of senior management, the person will be presumed, until the contrary is
proved by the employer, to be an employee of the person to whom services are
rendered, where one or more of the following factors are present:

  • the manner in which the person works is subject to the control or direction of
    the person to whom services are rendered;
  • the person’s hours of work are subject to the control or direction of the person
    to whom services are rendered;
  • in the case of a person who renders services to an organisation, the person
    forms part of that organisation;
  • the person has worked for the person to whom services are rendered for an
    average of at least 40 hours per month over the last three months;
  • the person is economically dependant on the person to whom services are
    rendered;
  • the person is economically dependant on the person to whom services are
    rendered;
  • the person only works for, or renders services to, one person.

In the case of senior managerial employees, or individuals who earn in excess of the
earnings threshold, the following additional factors are usually taken into account to
determine someone’s employment status, although no automatic presumption is
created:

  • the object of the contract between the parties is for the person to render
    personal services;
  • the person to whom services are rendered may choose when to make use of
    the services of the person;
  • the person to whom services are rendered may choose when to make use of
    the services of the person;
  • the person to whom services are rendered may choose when to make use of
    the services of the person;
  • the person to whom services are rendered may choose when to make use of
    the services of the person;
  • the person to whom services are rendered may choose when to make use of
    the services of the person;
  • the person belongs to the organisation’s pension fund or medical aid scheme
    (or qualifies for any other type of benefit).

In determining whether a person is an employee our courts and the CCMA are more
interested in the factual nature of the relationship between parties than the specific
label attached to the relationship by the contract. Should an employer treat a person
as an independent contractor under circumstances where the person is in reality an
employee, the employer is placed at risk since it is not providing the employee with
those benefits employees are legally entitled to. Furthermore, no income tax will be
deducted from the person’s remuneration, exposing the employer to tax problems.
Further, on termination of the person’s services the employer might face a claim of
unfair dismissal since it in all probability would not have followed the correct legal
procedures in terminating the person’s services.

Employers, to minimise their risk, would therefore be well advised to make sure that
they are properly informed about the exact legal nature of the relationship with those
rendering services to them.

23 May 2011
Author: Elsabé Huysamen

This information is published for general information purposes and is not intended to constitute legal advice and should not be construed as such. Specialist legal advice should always be sought in relation to any particular situation. Maserumule will accept no responsibility for any actions taken or not taken on the basis of this publication. Consent must be obtained from Maserumule before the information provided herein is reproduced in any way. No person shall have any claim of any nature whatsoever arising out of, or in connection with, the information provided herein against Maserumule and/or any of its personnel.

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