a. Laws and Guiding Principles
The re-characterization of an independent contractor as an employee can only take place by a Court or arbitration award, and will only occur where the reality of the nature of the relationship is found to be one of employment, despite the fact that the parties may have labelled their relationship as one of principal / independent contractor. Re-char-acterization usually takes place where the contract with the independent contractor is terminated by the principal and the contractor wishes to reinstate the contract or obtain termination benefits, and seeks to do this by claiming that he/she is in fact an employee before employment tribunals or courts.
b. The Legal Consequences of a Re-Characterisation
A failure to correctly characterise a relationship as an employment relationship exposes the employer to a number of legal risks when it is re –characterized:
i. Where the contract has been terminated by the employer, the employer will be exposed to unfair dismissal remedies. The primary remedy is reinstatement (even for senior employees) or re-employment, with or without back pay. Absent reinstatement or re-employment, financial compensation of up to 12 months remuneration could be awarded.
ii. If the contractor, re-classified as an employee, earns at a level that qualifies him / her under the BCEA for overtime pay, the employer could be liable for historic overtime pay. Moreover, in terms of the BCEA, a failure by an employer to comply with any provision of the BCEA or to pay any amount due in terms of the BCEA, may expose the employer to the risk of liability for the payment of a fine. For contraventions not involving the underpayment of any amount, fines ranging from R300 to R1500 per employee in respect of whom the failure to comply occurs, may be ordered. For contraventions involving underpayments, the fines range from 25% to 200% of the amount due, including any interest owing on the amount at the date of the order.
iii. The employer could be liable for historic unpaid annual leave owing to the contractor qua employee.
iv. If the employer has not been withholding income tax, it could be required by SARS to pay the income tax (and possibly fines) and would then be left with the challenge of recovering this from the contractor. The above said, there may also be further adverse tax consequences for the contractor as SARS may re-examine his / her tax returns for the duration of the contract and disallow deductions sought and obtained by the employee on the basis that he/she was an independent contractor.
v. If the employer has not been making social security contributions (unemployment insurance contributions, skills development levies, etc.) it could be required by the authorities to make good these payments.
vi. Although South Africa does not have any compulsory national retirement or superan-nuation contribution framework, if the employer has an occupational, company-specific retirement scheme it will often be the case that the scheme rules require compulsory membership and contributions for all employees of the employer and this could result in the employer being liable to make good contributions that should have been made (although this is rare in practice).
vii. As indicated earlier, where the employer is a foreign company that is not already registered in South Africa as an external company, re-characterisation of a relationship to one of employment may also trigger an obligation to register as an external company in terms of the Companies Act.
c. Judicial Remedies Available to Persons Seeking ‘Employee’ Status
An individual whose services have been engaged on an independent contracting basis, but who seeks employee status usually tries to assert his / her claim for employee status when the principal terminates the contract. The individual will then typically refer a dispute to an employment tribunal (usually the Commission for Conciliation, Mediation and Arbitration 20) or the Labour Court, claiming that he/she is an employee and that he/she has been unfairly dismissed. The principal has the opportunity to dispute the individual’s claim before the tribunal / Labour Court.
Should the individual be successful in proving that the relationship is in reality one of employment and that the dismissal was consequently unfair, as indicated above the individual could either be reinstated or re-employed (i.e. as an employee), or could be awarded compensation of up to 12 months remuneration for unfair dismissal. The payment of other basic conditions of employment could also be ordered. As regards tax, the Labour Court has in the past directed that a copy of the judgment (determining the employee status of the individual) be sent to SARS so that SARS can deal with the tax consequences.