Independent Contractors and Employees: Who Is Who and What Are My Obligations As an Employer

Independent contractors and employees: who is who and what are my obligations as an employer or contracting party?

Submitted by: Elsabe Klink, November 2014

Introduction

OT practices are subject to both the provisions of the Health Professions Act and the various rules and policies issued under that Act. In addition, labour law (including court rulings on this matter) and tax legislation govern this.

It is therefore important that OT’s, as employers, employees and as independent contractors understand the law, in order to avoid cost legal issues. Many OT’s think that if they enter into an agreement that says “independent contractor, that is what the relationship will be. This is however not the case, A court will look at “the actual relationship between the parties that is of decisive importance rather than the label that is attached to it.”[1]

Below we will look at labour law, tax law, the HPCSA rules and other downside/upsides to independent contractors. These sections are included as many people want to avoid the hassles of UIF, PAYE, retrenchments, disciplinary action, etc. by rather working through independent contractors. There are, however, some significant risks in terms of legal liability, so OT’s should carefully evaluate their options before embarking on any specific course of action.

Labour law

Who are employees?

In short, if you spend 80% or more of your time working for a particular entity or person, and that entity or person tells you what to do, how to do it, and/or prevent you from doing your own thing at your own time, or prevent you from working for or with others, you are an employee. An employment relationship implies very specific rights and duties for both the employer and the employee, such as compliance with the Basic Conditions of Employment Act, adherence to the Employment Equity Act and the principle of equal pay for equal value, etc.

Section 200(A) of the Labour Relations Act states “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 seven factors are:

(a) the manner in which the person works is subject to the control or direction of another person;

(b) the person’s hours of work are subject to the control or direction of another person;

(c) in the case of a person who works for an organisation, the person forms part of that organisation;

(d) the person has worked for that other person for an average of at least 40 hours per month over the last three months;

(e) the person is economically dependent on the other person for whom he or she works or renders services;

(f) the person is provided with tools of trade or work equipment by the other person; or

(g) the person only works for or renders services to one person.

Pursuant to the above section, a Code of Good Practice[2] pertaining to who is an employee was published in 2006. It lists six questions that will guide a decision as to whether someone is an employee or a contractor:

Employee / Independent Contractor
1. / Object of the contract is to render personal services. / Object of contract is to perform a specified work or produce a specified result.
2. / Employee must perform services personally. / Independent contractor may usually perform through others.
3. / Employer may choose when to make use of services of employee. / Independent contractor must perform work (or produce result) within period fixed by contract.
4. / Employee obliged to perform lawful commands and instructions of employer. / Independent contractor is subservient to the contract, not under supervision or control of employer.
5. / Contract terminates on death of employee. / Contract does not necessarily terminate on death of employee.
6. / Contract also terminates on expiry of period of service in contract. / Contract terminates on completion of work or production of specified result.

There are four types of employees, all of which have the rights and responsibilities as per laws such as the Basic Conditions of Employment Act, etc:

·  fixed term employees (e.g. locums who work for a fixed period of up to 6 months to stand in for someone else);

·  temporary employees (someone who only works for a day or two when someone else is unable, for example;

·  permanent employees (i.e. full-timers) and

·  part-time employees (i.e. someone work works permanently, but only a few hours a day, or only certain days in a week).

Who are independent contractors?

An independent contractor is a free agent, working in his or her own name, or under a business name, and is able to pick and choose work (i.e. who to contract with) and is free to negotiate the terms of that agreement so that it suits him or her.

An independent contractor on the other hand, is loyal to a contract rather than to an employer. An independent contractor maintains all of his own equipment and uses it to carry out the single task that is given to him/her in terms of this contract, while benefiting his/her own business. The independent contractor decides on his own hours and is under no direction by an employer, only to perform up to standards agreed in the agreement. The employer cannot discipline the contractor, cannot prevent him or her from doing work for others, and cannot control the manner in which, at times at which the work is to be performed.

Independent contractor agreements that contain elements of control, supervision and direction by the employer, as well as that contains restraint of trade are likely to be deemed to be employment contracts, and not independent contractor agreements. The contract of the independent contractor on the other hand, is characterised by the fact that one person hires another person to do a specific job or a specific piece of work. The following can be said about the independent contractor:

The person letting out the work is seen as the principal and the person doing the work is seen as the agent. The contractual relationship is totally different – it is not a contract of employment, but a contract relating to the performance of a certain piece of work.

Another feature of the contract of an independent contractor is that there is far less control by the principal over the agent (contractor) than an employer has over the worker.

The Labour Relations Act and the Basic Conditions of Employment do not cover independent contractors. OT’s who use independent contracts should also ensure that such persons carry at all times adequate professional indemnity cover, and that the specific work relationships and work contexts and scopes have been disclosed to the insurer.

Tax law

Although someone may be an independent contractor under SA labour law, SARS may still deem him/her to be an employee for tax purposes, and all OT’s that use independent contractors should ensure that they comply with these requirements:

Schedule 4 of the Income Tax Act defines “an employee” as including” any Personal Service Provider” (“PSP”). This places a tax-withholding obligation where the must therefore deduct for these persons Pay As You Earn (PAYE) on remuneration, as they would do with an employee.

A PSP is defined as an individual or company on behalf of which the service is provided, 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 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.

The most frequent condition in the health sector is that the contractor actually earns 80% of their income from the specific employer.

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

A further downside for contractors is that 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.

HPCSA

The HPCSA prohibits the employment of locums for periods exceeding 6 months. A locum is someone who acts in the place of an existing employee or practice owner, on a temporary / fixed-term basis, such as when people are on leave or ill.

The HPCSA requires of practice-owners to have full control and oversight over their practices, and it is therefore not possible to practice via “remote control” and run numerous practices at which locums are employed.

The HPCSA also prohibits practitioners from exploiting others, or having themselves be subjected to exploitation. Therefore an OT that enters into an independent contractor agreement well-knowing that s/he is actually an employee, could themselves face disciplinary action by the HPCSA.

It must also be noted that the HPCSA Ethical Rules only allow practitioners to employ persons who are registered in the same category as themselves, e.g. a physiotherapist cannot employ an OT, or vice versa, as the two are registered in different categories at the HPCSA.

Upside or downside – other laws that will impact on the assessment

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. However, if a person is an independent contractor, s/he could sue the employer where s/he undertook the work, and there would be no limits on such claim. Where an independent contractor passes away, the family would also have the right to institute legal action.

The provisions of the National Health Act place a duty on all health facilities to ensure that their employees, patients and third parties (i.e. independent contractors) are safe. All practices must therefore ensure that not only the provisions of the Occupational Health and Safety Act is complied with, but also the common law obligations to ensure safety at the specific workplace.

It is recommended that all practitioners have public liability insurance on top of their professional indemnity cover.

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1

[1] Motor Industry Bargaining Council vs Mac-Rite Panel Beaters and Spray Painters (Pty) Ltd 2001 (2) SA 1161 (N).

[2] http://www.labour.gov.za/DOL/downloads/legislation/notices/occupational-health-and-safety/Notice%201774%20-%20OHS%20-%20Who%20is%20an%20employee.pdf.