The main pieces of employment legislation, chief among which are the Labour Relations Act 66 of 1995 (“LRA”) the Basic Conditions of Employment Act 75 of 1997 (“BCEA”) and the Employment Equity Act 55 of 1998 (“EEA”), apply to employees and not independent contractors. The term “employee” is defined to mean any person, excluding an independent contractor, who works for another person or for the State and who receives, or is entitled to receive, any remuneration, and any other person who in any manner assists in carrying or conducting the business of an employer.
Independent contractors are thus specifically excluded from the application of the employment legislation in question. However, there is no statutory definition of the term ‘independent contractor’. As a result a number of tests have been established through a combination of case law, the introduction of a presumption of employment provision in the LRA and BCEA in 2002, and a Code of Good Practice on “Who is an Employee” issued under the LRA in 2006.
a. Factors that Determine Who is an Employee and who is an Independent Contractor
South Africa’s common law recognised the distinction between a contract of service (an employer-employee relationship under which the employee subordinated his or her services to the authority of the employer – a locatio conductio operarum) and a contract for services (a principal – independent contractor relationship where the former contracts the latter to deliver certain services and there is no subordination by the contractor, who instead is answerable to the service deliverables contracted for – a locatio conductio operis). Importantly, however, South African courts will not be bound by the labels that parties chose to attach to their relationship or defer to the declared intent of the parties in this regard, whether in their contract or elsewhere. Thus, stipulating in acontract (or elsewhere) that a relationship is one between independent contractor and principal or referring to the contract as an independent contractor or consultancy agreement, when the relationship between the principal and the contractor is, in reality, one between employee and employer, does not make the relationship any less of an employment relationship, and vice versa.
Over the years the courts have evolved various tests for distinguishing an employment relationship from an independent contractor relationship.
They have identified a number of primary characteristics of employment contracts and independent contractor contracts that may assist in distinguishing the nature of the relationship. These primary characteristics can be summarised as follows:
The prevailing approach of the courts is one that can be described as a “reality approach”, which involves assessing the reality of the relationship by taking account all of the relevant factors on a substance-over-form basis, the public interest and the fact that parties have no licence to artificially take themselves out of the scope of important legislation such as the LRA, the BCEA and the EEA. The objective is to ascertain the true relationship between the parties. When considering the factors relevant to this question, no single indicator is regarded as decisive (although some are more influential than others) and an examination of the relationship between the principal and the contractor as a whole is required in order to arrive at a conclusion as to whether the relationship is one of employment or not. How-ever, the most recent authoritative judgment1 on the issue of determining whether an employment relationship exists for employment law purposes has highlighted that the three most important factors are:t
i. Whether the principal has rights of supervision and control over the contractor, i.e. whether the contractor is obliged to follow the instructions of the principal, including whether the principal is able to dictate to the contractor when he/she is required to render their services, the manner in which such services are rendered and generally whether the contractor is at the principal’s ‘beck and call’;
ii. Whether the contractor forms an integral part of the principal’s organisation, e.g. whether the contractor participates or is an integral part of the principal’s internal management and/or staff structures; whether the contractor is ‘part and parcel of the organisation’ or whether the work done is for the business but is not integrated into it and is only accessory to it; whether the contractor would appear to an outsider to be an employee of the principal (e.g. is the contractor provided with a company email address, contact telephone number, business card, dedicated office space at the principal’s prem-ises, and is the contractor able to hold him/herself out to others as an employee of the principal). The above said, the fact that a contractor may be required to carry an identity card, wear a uniform and use branding associating them with the principal does not nec-essarily make him or her an employee – in owner-driver cases, for instance, contractors that had to carry such identity cards, wear such uniforms and use the principal’s branding on their vehicles (and even where the purchase of the vehicles was financially assisted by the principal) were nevertheless found to be employees taking onto account the other circumstances of the relationship 2;
iii. Whether the contractor is economically dependent on the principal or whether he/ she is free to derive income from other sources as well. The courts have differentiated between personal dependence and economic dependence in this regard. A person who is truly self-employed cannot be economically dependent on their “employer” when he or she retains his or her ability and power to contract with and render services to other persons or entities. This means that an individual who is still free to provide his services to other persons will likely not be regarded as an employee on account of retaining this freedom to contract with and render services to others. Whether or not the individual actually exercises this freedom is strictly speaking irrelevant for determining if the rela-tionship is an employment relationship or not, but if he/she has done so and thereby renders services to a multiplicity of different persons, he/she is more likely to be regard-ed as an independent contractor.
The above three factors are not the only factors to be taken into consideration; instead, the relationship as a whole needs to be examined in conjunction with the various considerations above, in order to draw a conclusion as to the true nature of the relation-ship between the company and the contractor. All relevant factors that emerge from an examination of the realities of the parties’ relationship must be considered.
The above factors, along with others, have also been incorporated in a rebuttable presumption introduced in the LRA and the BCEA in 2002, specifying when certain lower-earning individuals will be presumed to be employees.
The statutory presumption as to who is an employee
Under the LRA and BCEA, a person who earns less than an earnings threshold amount determined by the Minister of Labour in terms of the BCEA3, and who works for or renders services to another person, will be presumed – until the contrary is proved and regardless of the form of the contract – to be an employee of the other person if 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 other person;
• the person’s hours of work are subject to the control and direction of the other person;
• in the case of a person who works for an organisation, the person is a part of that organisation;
• the person has worked for the other person for an average of at least 40 hours per month over the last 3 months;
• the person is economically dependent on the other person;
• the person is provided with tools of trade or work equipment by the other person; or
• the person only works for or renders services to the other person.
Some of the other circumstances commonly considered when assessing the nature of a relationship include the following:
Payment / remuneration arrangements. Where payment or remuneration is paid on a regular, periodic basis (e.g. monthly) based on hours worked, this will indicate employ-ment. Independent contractors, on the other hand, are usually paid specified amounts for reaching pre-agreed deliverables upon submission of an invoice after the achieve-ment of the deliverable;
Provision of tools of the trade or equipment. Where the person has to provide their own tools of the trade and equipment, this will indicate an independent contractor relation-ship. An independent contractor is likely to invest in his or her own assets and use their own tools and equipment of trade, whereas an employee is more likely to use tools and equipment provided by his or her employer;
Expenses. An employee will usually be reimbursed by his or her employer for expenses incurred in the performance of his or her work, while an independent contractor will typically bear his or her own business expenses; and
Benefits. Benefits such as paid leave, allowances and contributions to benefit funds are typical of an employment relationship. Where an independent contractor receives such benefits from his or her principal, this will tend to indicate that the relationship is really one of employment.
Does the fact that the contractor is an incorporated entity make a difference?
While it is so that, where the contractor is an incorporated entity, this will tend to indi-cate an independent contractor relationship (because employers do not typically engage companies as employees), the courts have not hesitated to find that an employment relationship exists where the substance of the relationship is really between the principal and the individual representing the incorporated entity, and the individual is working as if he/she is an employee of the principal.4
b. General Differences in Tax Treatment
The correct classification of a relationship as either employment or independent contracting is also important as a result of the differences in tax treatment. In terms of the Fourth Schedule to the Income Tax Act employers (as defined) who are South African residents and who pay (or are liable to pay) remuneration (as defined) to any employee (as defined) have a duty to deduct or withhold employee’s tax from an amount of remuneration before paying it to the employee. The amount of an employee’s tax withheld must be paid over to the South African Revenue Services (“SARS”).
Aside from certain exceptions, independent contractors do not earn “remuneration” as defined, and the withholding obligation of the Fourth Schedule will not apply.
The Income Tax Act provides for its own statutory tests for determining whether a person is an independent contractor or an employee earning remuneration:
i. The exclusion from the definition of “remuneration” in the Fourth Schedule to the Income Tax Act provides two statutory tests, which deems a person not to be an independent contractor for employees’ tax purposes. The statutory tests provide for a deeming provision that a person shall not carry on a trade independently if the services or duties are required to be performed mainly at the premises of the client and:
- the worker is subject to the control of any other person as to the manner in which his duties are or will be performed, or as to the hours of work; or
- the worker is subject to the supervision of any other person as to:
- the manner in which his duties are or will be performed; or
- the hours of work.
ii. Where any one of the above statutory tests apply positively, the worker will be deemed not to be an independent contractor and the amount paid to the worker will therefore be included in remuneration and the principal will have to withhold income tax.
iii. Despite the above, a person who employs three or more full-time employees, who are not connected persons in relation to such person and are engaged in that person’s business throughout the particular year of assessment, will be deemed to be carrying on a trade independently.
iv. Control of manner
In terms of a SARS Interpretation Note (Note 17), the employer controls the manner in which work is done either by detailed instructions, by training, by requesting that pri-or approval be sought, or by instituting disciplinary steps in the event of unacceptable performance by the worker, etc. In this regard, “control of manner” means control as to which tools or equipment to use, which other workers to involve or employ, which raw materials to use and where to obtain them, which routines, patents or technologies to use, etc. All of these are elements of commanding and directing an operation to render a particular business result.
SARS Interpretation Note 17 further provides that where the employer has the contrac-tual power to control the manner of use of a worker’s productive capacity, it is likely that the employer intended to acquire (and the worker acquiesced to the surrender of) productive capacity. However, the absence of this form of control does not mean that there can be no employee relationship. Any form of control must flow from the legal relationship (the contract) itself and not from some extraneous source (for example, the nature of the trade or profession, the workplace, or market conditions). It is sufficient if the right of control is contractually present, even if it is not exercised in practice.
SARS Interpretation Note 17 provides that an employer controls the work done and the environment in which the work is done by giving instructions as to the location, when to begin or stop, pace, order or sequence of work etc. It should be noted that, the greater the degree of supervision (that is, the scope or extent of instructions, or the sanctions for non-compliance), the greater the indication in favour of employee status. Any form of supervision must flow from the legal relationship (the contract) itself and not from some extraneous source like the nature of the trade, profession, workplace or market conditions. It is sufficient for the right of control to be contractually present, even if it is not exercised in practice.
Furthermore, SARS Interpretation Note 17 provides that a restraint of trade involves control of the future use of productive capacity, and is intended to prevent unfair competition by protecting sensitive business information, as well as to promote stability of employment. Although a restraint of trade can be imposed on an employee or an inde-pendent contractor, independent contractors would ordinarily be subject to a “secrecy clause”. A restraint of trade would tend to indicate an employment relationship.
However, even if the relevant contractor qualifies as an independent contractor in terms of the Income Tax Act tests above, SARS is of the view that consideration must then also be had to a common law test, namely a so-called ‘dominant impression’ test. SARS has developed a guideline in the form of a common law dominant impression grid, aimed at providing guidance as to whether or not there is a dominant impression that the relevant individual is an independent contractor or an employee. The grid sets out the more com-mon indicators in tabular form but is not meant to be exhaustive. The indicators provide insight into the quality of control, the nature of financial relations and the degree of exclusivity of the relationship. The indicators have been classified into three categories, namely:
• near-conclusive (those relating “most directly to the acquisition of productive capacity”);
• persuasive (those establishing “the degree of control of the work environment”); and
• resonant of either an employee/employer relationship or an independent contractor/client relationship, whichever is relevant.
Each indicator in the grid must in itself be analysed with due regard for the particular context (kind of industry, kind of business, kind of customer, kind of worker), and how the business actually operates. One must analyse the relationship in light of all the indicators and their relative weightings, and arrive at a dominant impression in favour of either the acquisition by the employer of the worker’s productive capacity (that is, of labour power, capacity to work, or simply effort), or of the result of the worker’s productive capacity. This dominant impression will be the basis for classification of the relationship as either an employee relationship or an independent contractor relationship.
Expatriate employees performing services in South Africa may in certain instances be required to pay South African employee’s tax on South African sourced income, subject to any double tax arrangements which may be in place between South Africa and the expatriate employee’s home country. This aspect will require careful consideration of the factual circumstances on a case by case basis.
In terms of the definition of “remuneration” contained in paragraph 1 of the Fourth Schedule to the Income Tax Act, a person who is not a resident cannot qualify as an independent contractor. Expatriate independent contractors working in South Africa will therefore be subject to a tax withholding obligation on any South African sourced income.
Registration for Value-Added Tax
Independent contractors who carry on an “enterprise” as defined in the Value Added Tax Act 89 of 1991 (“VAT Act”) may be obliged to register for VAT purposes in South Africa. The obligation to register for VAT will generally arise if the ‘enterprise’ has taxable income (comprising of standard rated and zero rated supplies) with a value of more than R1 Million per annum.
c. Differences in Benefit Entitlement
Employees in South Africa are entitled to certain minimum employment benefits, while independent contractors are not.
Subject to some exclusions, all employees are entitled to a number of statutory minimum entitlements and basic conditions of employment.
The BCEA sets general mandatory rules relating to basic conditions including the regulation of working time, leave, particulars of employment and remuneration (although there is currently no prescribed national minimum wage), termination of employment and the prohibition on the employment of children and forced labour. For certain sectors (such as for example farming, hospitality, domestic workers etc.) there are also sectoral determinations published by the Department of Labour providing for certain conditions of employment applying only to that sector which may be different from the conditions as per the BCEA, including but not limited to minimum wages particular to those sectors.
The BCEA statutory minimum employee benefits and conditions of employment are briefly as follows:
• employees may not be required to work more than 45 ordinary hours in any week and 9 ordinary hours on any day (if the employee works 5 days a week) or 8 hours on any day (if the employee works more than 5 days a week);
• employees may not be required to work more than 10 hours overtime in any week, and any overtime hours worked will generally attract enhanced pay;5
• employees who work continuously for more than 5 hours are entitled to a meal interval of 1 continuous hour, but agreement may be reached to reduce the meal interval to 30 minutes or to dispense with a meal interval for employees who work less than 6 hours a day;6
• employees are entitled to a daily rest period of at least 12 consecutive hours and a weekly rest period of at least 36 consecutive hours which should include a Sunday (unless agreed otherwise);7
• work on Sundays is permitted but such work will attract enhanced rates of pay;8
• work on public holidays is permitted provided that the employee has agreed to do so, and any such work will attract enhanced rates of pay;9
• night work is regulated and may attract additional payments such as night work allowances;10
• employees are entitled to 21 consecutive days annual leave (i.e. 15 working days, if the employee works 5 days a week) per annual leave cycle of the 12 months 11, sick leave equivalent to the number of days worked during a 6 week period for every 36 consecutive months12, 3 days family responsibility leave per year and qualifying employees are entitled to 4 consecutive months’ unpaid maternity leave;13 and
• employees are entitled to minimum periods of notice of termination.14
Statutory regulation of working hours, overtime work, night work and work on Sundays and public holidays does not apply to senior managerial employees, sale staff who tra-vel and regulate their own working hours, employees who work less than 24 hours a month and employees who earn more than the BCEA earnings threshold15.
Employees are also entitled to claim compensation benefits for work-related injuries and diseases16 and unemployment and maternity pay17 from statutory compensation funds, to which employers contribute.
Unfair labour practice protection
Employees may not be subjected to unfair labour practices.
Health and safety
Under the Occupational Health and Safety Act [ ] of 1993, employers owe all their employees statutory duties to maintain a safe workplace and minimize the exposure of employees to workplace hazards.
As opposed to employees, independent contractors are only entitled to such “benefits” and terms as have been agreed to between the independent contractor and his / her client.
Independent contractors are not entitled to any of the statutory minimum employ-ment-related entitlements highlighted above, save that, in the case of health and safety, while they do not qualify as ‘employees’ under the Occupational Health and Safety Act, the principal still owes them the general duties that are owed to persons other than employees under the Act, namely the principal must conduct its business in such a manner as to ensure as far as is reasonably practicable that persons other than its employees who may be directly affected by the principal’s activities are not thereby exposed to hazards to their health or safety.
d. Differences in Protection from Termination
Employees are protected against the unfair termination of their employment by an employer. The LRA requires any termination of employment to be substantively fair (i.e. for a fair reason) and procedurally fair (i.e. after following a fair procedure). Accepted fair reasons for dismissal are misconduct, incapacity (ill-health and work performance) and operational requirements of the employer (i.e. redundancy or restructuring).
The BCEA also provides for certain minimum notice periods that must be adhered to when terminating on notice, with the minimum periods ranging from 1 weeks’ notice during the first 6 months of employment to 4 weeks’ notice if employed for more than a year (or if the employee is a farm worker or domestic worker who has been employed for more than 6 months) 18. Employees may not be required to give longer notice of termina-tion than the employer but an employer may elect to pay an employee in lieu of notice 19.
Upon termination of employment employees are also entitled to certain statutory minimum termination pay-outs such as pay in lieu of notice (if the employee is not required to work out his notice period), payment for any accrued but untaken annual
leave and payment of any other accrued amounts which remain unpaid. If the reason for termination relates to the employer’s operational requirements the employee will also be entitled to severance pay equal to no less than 1 weeks’ remuneration for every completed year of service.
Independent contractors, on the other hand, do not enjoy any protection from the termination of their contracts other than general protections against contractual breach and common law unlawful termination. Termination of independent contracting rela-tionships is therefore governed by the agreement between the parties.
e. Local Limitations on Use of Independent Contractors
There are no specific local limitations on the use of independent contractors.
f. Other Ramifications of Classification
While contractors do not enjoy protection against unfair discrimination under the Employment Equity Act, as this Act only applies to employees or applicants for employment, they enjoy similar protection under the Promotion of Equality and Prevention of Unfair Discrimination Act [ ] of [ ].
An employer is vicariously liable for its employees’ actions performed during the course and scope of their employment, but a principal it is not liable for any actions committed by an independent contractor in the course and scope of the contractor’s work for the principal.
Obligation for a foreign company to register in South Africa as an external company For foreign companies the correct classification of an individual as an employee or independent contractor can also be important for purposes of compliance with South African company laws. Foreign companies who have no presence in South Africa but who are party to an employment contract within South Africa are required to regis-ter as an external company with the Companies and Intellectual Property Commis-sion in South Africa within 20 days of entering into the employment relationship. The compliance consequences of such a registration are mostly administrative in nature, but there is an obligation to continuously maintain at least one office in South Africa.
g. Leased or Seconded Employees
Temporary employment services
Atypical employment relationships such as the use of leased workers from temporary employment services (commonly referred to as labour brokers in South Africa) are expressly regulated in South African employment legislation (primarily the LRA). A labour broker is defined as a person who, for reward, procures for or provides to a client other persons who perform work for the client and who are remunerated by the labour broker. Where a labour broker supplies employees to a client under a labour broking arrange-ment that complies with the legislation, the labour broker is regarded as the employ-er of the labour broker employees to the exclusion of the client. Notwithstanding this, the client will be jointly and severally liable with the labour broker if the labour broker (in respect of its employees supplied to the client) contravenes a collective agreement concluded in a bargaining council regulating terms and conditions of employment, a binding arbitration award that regulates terms and conditions of employment, the BCEA or a sectoral determination.
In addition to the above, labour broker employees who earn less than the BCEA earnings threshold are entitled to additional protections in terms of section 198A of the LRA. An employer (i.e. the client) who uses such labour broker workers for longer than 3 months is deemed to be the employer of the labour broker employees and, unless the labour broker employee is employed on a fixed term basis in accordance with section 198B of the LRA, the labour broker employee will be deemed to be indefinitely employed by the client.
The legal and practical consequences of this deeming provision have not yet been finally determined but at the very least it will result in:
• the labour broker employees having to be treated on the whole not less favourably than the employees of the client who perform the same or similar work than the labour broker employees, unless there is a justifiable reason for the difference in treatment;
• the client and labour broker will be jointly and severally liable for the contravention of a collective agreement concluded in a bargaining council regulating terms and conditions of employment, a binding arbitration award regulating terms and conditions of employment, the BCEA or a sectoral determination;
• the labour broker employees may institute proceedings in terms of the LRA (including but not limited to unfair dismissal and unfair labour practice claims) against either the client or the labour broker, and any award or order in this regard against either, may be enforced against either the client or the labour broker.
Secondment of employees
Secondment of employees is an accepted practice in South Africa, and may take place on account of an agreement between the employee, his employer and the entity to which he will be seconded. Depending on the specific circumstances of the secondment, it may result in the employee qualifying as an employee of both employers involved in the secondment.
h. Regulations of the Different Categories of Contracts
South African employment law is protective of employees and many aspects of the employer/employee relationship are regulated by legislation and, in highly unionised industries, by collective agreements. As indicated above, the BCEA regulates basic conditions of employment and impacts directly on what can be provided for in employment contracts (in industries where a sectoral determination has been issued or there is a bargaining council under which industry collective agreements are concluded, these instruments will further regulate what may be provided for in employment contracts in those industries). The LRA also provides substantive regulation for the termination of the employment relationship and employment contracts, whether the employment contract is for an indefinite or a definite period, as well as unfair labour practice protections for employees.
There is no specific national legislation regulating independent contractors or a self-employment relationship. The general civil, commercial and corporate laws will apply.