South Africa: Reality Check: The Hidden Risks Of Using Independent Contractors

Last Updated: 9 December 2011
Article by Irvin Lawrence

Most Read Contributor in South Africa, September 2018

The Labour Relations Act 66 of 1995 defines an employee as "any person, excluding an independent contractor who works for another person or for the State.....". It is clear from this definition that "independent contractors" have been specifically distinguished from "employees". Shortly after the introduction of the Labour Relations Act in 1996, and seemingly in light of this distinction drawn between independent contractors on the one hand and employees on the other, many businesses sought to avoid the complications of formal employment relationships by opting for "independent contractor" type arrangements. Typically one saw a surge of persons generally being presented with pro forma contracts that purported to transform them into self-employed enterprises. In a number of instances, some employers were even so bold as to transform, literally overnight, a significant portion of their existing employee complement into "independent service providers" who would be paid against the issuing of an invoice for work done. In many cases, these "independent contracts" contained declarations to the effect that the "agreement did not constitute an employment relationship" or acknowledgements by the "contractor" that he had "no claims in law for unfair dismissal or on the basis of the protections afforded by the Basic Conditions of Employment Act".

This problem was highlighted in Building Bargaining Council (Southern and Eastern Cape) vs Melmons Cabinets CC & Another where the Labour Court described an arrangement where an employer had required its employee to sign a contract calling himself an "independent contractor" as a cruel hoax. The Court found that the worker concerned was an employee despite the contract referring to him as an independent contractor. As can be expected, it was generally the bargaining councils that sought initially to mount challenges against the artificiality of these so-called independent contractor relationships as they presented a significant threat to the levy income payable to bargaining councils and also left many persons vulnerable and without the protections and benefits that otherwise flow to employees who are subject to bargaining council benefits such as holiday pay, sick leave and overtime pay. In Motor Industry Bargaining Council vs Mac-Rite Panel Beaters and Spray Painters (Pty) Ltd the Court referred to one such contract as "not only a subterfuge but a bizarre one designed to strip workers of the protections to which they are entitled....". The Court went on to observe that "it is the actual relationship between the parties that is of decisive importance rather than the label that is attached to it."

Shortly after the resort to this proactive approach by the Courts in piercing through many of these so-called independent contractor arrangements, the legislature sought to amend both the Basic Conditions of Employment Act and the Labour Relations Act by the insertion of presumptions dealing with who an employee is (see Section 200(A) of the Labour Relations Act and Section 83(A) of the Basic Conditions of Employment Act). It is abundantly clear that the introduction of these presumptions by the legislature was designed to discourage the wholesale resort to these artificial independent contractor arrangements. Section 200(A) of the Labour Relations Act begins by stating that "until the contrary is proved and regardless of the form of the contract" a person is presumed to be an employee if any one or more of "a number of factors" are present. These factors revolve around an examination of "the manner in which the person works, his hours of work, whether he is subject to the control and direction of the employer, whether the person forms part of the organisation of the work provider, etc." Armed with these amendments, the Labour Court demonstrated an even more aggressive readiness to interrogate these so-called independent contractor relationships as was apparent from the case of Denel (Pty) Ltd vs Gerber.

In that case the Court emphasised the need to have regard "to the realities of the situation when deciding on the existence or otherwise of an employment relationship". Here the Labour Appeal Court went so far as to look through the use of an intermediary, namely a close corporation, that had been "contracted with to provide services" and found that in reality an employment relationship existed between Denel and Gerber.

But are these the only dangers to employers who resort to these sham or artificial arrangements involving independent contractors? Many businesses have tended to use independent contractors or labour brokers primarily to avoid the challenges that are presented by formal employment relationships and the risks associated with unfair dismissals, unfair retrenchments, payment of overtime and with many of the other rights that our progressive employment statutes have accorded to employees. But there are a number of significant risks that employers tend to ignore (or which they are not aware of) in using independent contractors. The Compensation for Occupational Injuries and Diseases Act ("COIDA") provides a statutory insurance to employers and effectively precludes employees from suing their employers for recovery of any damages that they may suffer as a result of occupational injury or disease that results in disability or death of that employee.

What is the position however if an independent contractor contracts an occupational illness or suffers an injury whilst working on the premises of a work provider? In such an instance, the unfortunate reality is that there is no bar in law to this "independent contractor" instituting action against the work provider for any damages or losses that result from occupational injury or disease or for that matter from the dependents from a deceased "contractor" instituting such a damages claim. The potential for this type of litigation becomes even more apparent if one has regard to the Occupational Health and Safety Act ("OHSA") which seeks to impose a number of responsibilities upon owners and users of machinery and equipment seemingly in an effort to engender occupational health and safety in the workplace. Unlike other labour legislation, the OHSA is not simply confined to situations where an employment relationship is present. In this regard, it imposes health and safety obligations on work providers in respect of self-employed persons and persons engaged in the manufacture, production or sale of machinery or substances used in the workplace. Employers are required not only to ensure the health and safety of their own employees but of all persons who may be directly affected by its activities. Even though in a number of instances these contract arrangements are concluded between work providers and "independent contractors" where the "independent contractor" does register its employees under COIDA, there is still a significant threat of work providers being sued for occupational injuries or disease. The registration of these employees of "independent contractors" with COIDA does not preclude those employees from suing the work provider from what is in law termed as 'general damages'. General damages generally involves claims for pain and suffering, loss of amenities of life and disfigurement, and are to be distinguished from special damages which involve the direct cost of hospital expenses, doctors' expenses, loss of income from employment, etc. It is apparent that in many instances the quantum of general damages will by far be the largest portion of an injured person's claim. Work providers are not covered by COIDA against any claims for such general damages. Moreover, even though employees of independent contractors may recover some special damages through COIDA (if they are registered by their independent contractor employer), they are still entitled in law to recoup any unrecovered special damages directly from the work provider. The position is the same with regard to labour brokered persons who are injured or who die on a work provider's site as a result of an occupational injury or disease.

Another often overlooked risk of utilising independent contractors or labour brokered personnel is presented by the Income Tax Act 58 of 1962. Schedule 4 of the Income Tax Act defines an 'employee' as including, inter alia, any labour broker and any Personal Service Provider ("PSP"), which terms are also defined in Schedule 4 of the Income Tax Act. The inclusion of labour brokers and PSP's into the definition of 'employee', places a withholding obligation on a work provider or client utilising such service providers. As such, they will generally be held liable to the South African Revenue Service (SARS) for failing to withhold Pay As You Earn (PAYE) on remuneration paid to the Labour Brokers and PSP's. PSP's generally involve small entities that provide employment type services to clients or work providers at their premises. A PSP is defined as including a Company or Trust where the service provided, is provided via a person who is a connected person in relation to such company or trust, and:

  • such person would be regarded as an employee of such client if such service was rendered by such person directly to such client, other than on behalf of such company/ trust; or
  • where those duties must be performed mainly at the premises of the client, such person or such company/trust is subject to the control or supervision of such client as to the manner in which the duties are performed or are to be performed in rendering such service; or
  • more than 80 percent of the income of such company/trust during the year of assessment, from services rendered, consists of or is likely to consist of, amounts received directly or indirectly from any one client of such company/trust.

A company will be deemed not to be a PSP if such company or trust, throughout the year of assessment, employs three or more full-time employees.

A further implication of being classified as an 'employee' means that labour brokers and PSP's will only be entitled to limited income tax deduction. They would not be entitled to claim as income tax deductions many of the normal expenses (other than the remuneration of the employees it uses) regarded as expenditure incurred in the production of income and which otherwise would be deductible.

The indicated risks inherent in the use of independent contractors, PSP's and labour brokers should therefore be carefully weighed up by work providers against any possible advantages so as to ensure that informed decisions are made as to the prudence of their use. Where use is made of independent contractors, PSP's or labour brokers, work providers would be well-advised to include in their contracts with these entities, appropriate indemnities, mandatory clauses and insurance obligations to mitigate against the risks and possible liability that attach to their use.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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