The Difference Between Employees and Independent Contractors
The Difference Between Employees And Independent Contractors
An independent contractor is a colloquial term for a small-time sub-contractor. An independent contractor is merely another word for “entrepreneur”, or perhaps, “employer” (or potential employer). The word “independent” in the concept of “independent contractor” refers to independence from the employer’s organization, as well as from the employer’s control. An independent contractor must be distinguished from its counterpart, the employee. Legally, the two terms (independent contractor and employee) are mutually exclusive and are direct opposites.
The liability of an employer to deduct employees’ tax is dependent on whether “remuneration” is paid. Subject to certain conditions, amounts paid to an independent contractor for services rendered are excluded from “remuneration” as defined, in which case an employer has no obligation to deduct employees’ tax from the amounts paid. There are two sets of tools available to determine whether a person is an independent contractor for employees’ tax purposes.
The first tool is referred to as the statutory tests.
There are two statutory tests, and they are both conclusive in nature.
- If the first test is met, the person is deemed not to be carrying on a trade independently, with the result that the amount paid is deemed to be “remuneration” and will be subject to employees’ tax, unless the second test is met.
- The first test has two parts.
If both parts are satisfied the individual will be deemed to be an employee:
- Where is the service performed? Mainly (more than 50%) at the premises of the client / “employer”
- Is the person under the supervision and control of the company/employer? Control regarding the manner of the worker’s duties or regarding the hours worked.
If the answer to any of the above is “yes”, then the individual is an employee.
The second tool is the common law test, used to determine whether a person is an independent contractor or an employee. Unfortunately, the common law tests as they apply in South Africa do not permit a simple “checklist” approach. There are no hard and fast rules in determining whether a person is an independent contractor. An “overall” or “dominant impression” of the employment relationship must be formed.
The test is classified into three categories:
— Near conclusive (those relating “most directly to the acquisition of productive capacity”);
— Persuasive (those establishing “the degree of control of the work environment”); and
— Relevant to an employer-employee relationship or an independent contractor or client relationship, whichever is relevant.
This classification or weighting is intended to assist auditors in making the determination. The weightings are based on SARS’s assessment as to what is appropriate and fair to an employee vs independent contractor determination for the purposes of withholding employees’ tax.
In practice, the statutory tests are considered first. The common law tests are applied to determine whether the person is an independent contractor or an employee only if the statutory tests are not applicable in a particular situation.
Common Law dominant impression test grid
INDICATOR | SUGGESTS EMPLOYEE STATUS | SUGGESTS INDEPENDENT CONTRACTOR STATUS | |
NEAR-CONCLUSIVE Control Manner/Exclusive Acquisition. | Control of the manner of working | Employer instructs (has right to) which tools/equipment, staff, raw materials, routines, patents, technology | A person chooses which tools/equipment, staff, raw materials, routines, patents or technology |
Payment regime | Payment by a rate x time-period, but regardless of output or results | Payment by a rate x time-period but with reference to results, or payment by output or “results in a time period” | |
A person who must render the service | A person obliged to render service personally, hires & fires only with approval | Person, as the employer, can delegate to, hire & fire own employees, or can subcontract | |
Nature of obligation to work | A person obliged to be present, even if there is no work to be done | A person only presents and performs work is actually required, and chooses to | |
Employer (client) base | A person bound to an exclusive relationship with one employer (particularly for independent business test) | A person is free to build a multiple concurrent client base (especially if tries to build a client base, advertisements, etc) | |
Risk/Profit & loss | Employer bears risk (pays despite poor performance/slow markets) (particularly for independent business test) | Person bears risk (bad workmanship, price hikes, time over-runs) | |
PERSUASIVE Extent of Control | Instructions/Supervision | Employer instructs on location, what work, sequence of work, etc, or has the right to do so | The person determines their own work, sequence of work, etc. Bound by contract terms, not orders as to what work, where, etc |
Reports | Control through oral/written reports | Person not obliged to make reports | |
Training | Employer controls by training the person in the employer’s methods | The worker uses/trains in their own methods | |
Productive time (work hours, work week) | Controlled or set by employer/person works full time or substantially so | At the person’s discretion | |
RELEVANT Labels, clauses, compliance, economic circumstances, “resonant” of | Tools, materials, stationery, etc | Provided by the employer, there is no contractual requirement that the person provides | Contractually/necessarily provided by the person |
Office/ workshop, admin/ secretarial etc | Provided by the employer, there is no contractual requirement that the person provides | Contractually/necessarily provided by a person | |
Integration/Usual premises | Employer’s usual business premises | Person’s own/leased premises | |
Integration/Usual business operations | A person’s service critical/integral part of the employer’s operations | A person’s services are incidental to the employer’s operations or success | |
Integration/Hierarchy & organogram | A person has a job designation, a position in the employer’s hierarchy | The person designated by profession or trade has no position in the hierarchy | |
Duration of relationship | Open-ended/fixed term & renewable ends on the death of a worker | Limited with regard to result, binds business despite worker’s death | |
Threat of termination/ Breach of contract | An employer may dismiss on notice (LRA equity aside), a worker may resign at will (BCEA aside) | Employer in breach if it terminates prematurely. Person in breach if fails to deliver product/service | |
Significant investment | Employer finances premises, tools, raw materials, training, etc | Person finances premises, tools, raw materials, training etc | |
Employee benefits | Especially if designed to reward loyalty | Person not eligible for benefits | |
Bona fide expenses or statutory compliance | No business expenses, travel expenses, and/or reimbursed by employer. Registered with trade/professional association | Over-heads built into contract prices. Registered under tax/labour statutes & with trade/professional association | |
Viability on termination | Obliged to approach an employment agency or labour broker to obtain new work (particularly for the independent business tests). | He has other clients and continues trading. Was a labour broker or independent contractor before this contract? | |
Industry norms, customs | Militate against independent viability Make it likely person is an employee | Will promote independent viability Make it likely person is an independent contractor or labour broker |
