When deciding whether a person is an employee rather than an independent contractor, the courts follow an approach usually referred to as the “dominant impression test”. In terms of this approach, it is necessary to evaluate all aspects of the contract and the relationship and then make a classification based on the “dominant impression” formed in that evaluation. Accordingly, there is no single factor that decisively indicates the presence or absence of an employment relationship. In this regard, the approach differs from that used when applying the presumption as the presumption comes into play if one of the listed criteria (seven factors) is present. That there is no single decisive criterion that determines the presence or absence of an employment relationship does not mean that all factors should be given the same weighting.
To determine whether a person is an employee, our courts seek to discover the true relationship between the parties. In certain cases, the legal relationship between the parties may be gathered from the construction of the contract that the parties have concluded. However, in practice, an interpretation of the wording of the contract will only determine the matter definitively if the parties expressly admit that the contract is consistent with the realities of the relationship or elect not to lead evidence concerning the nature of the relationship. The parol evidence (any agreement that is not contained within the written contract) rule that prevents oral evidence from being led to interpret a contract, has no application in determining whether or not a person is an employee for the purpose of labour legislation.
However, the contractual relationship may not always reflect the true relationship between parties. In these cases, the courts must have regard for the realities of that relationship, irrespective of how the parties have chosen to describe their relationship in the contract. Adjudicators should look beyond the form of the contract to ascertain whether there is an attempt to disguise the true nature of the employment relationship or whether there is an attempt by the parties to avoid
regulatory obligations, such as those under labour law or the payment of tax. Our courts have frequently noted that the inequality of bargaining power within an employment relationship may lead employees to agree to contractual provisions that do not accord with the realities of the employment relationship. This is particularly important in the case of low-paid workers who may have agreed to be classified as independent contractors because of a lack of bargaining power.
Disguised employment is a significant reality in the South African labour market and has been dealt with in a number of reported decisions. The Employment Relationship Recommendation, 2006 of the International Labour Organisation states that a “disguised employment relationship occurs when the employer treats an individual as other than an employee in a manner that hides their legal status as an employee”. It is an established principle of our law that the label attached to a contract is of no assistance where it is chosen to disguise the relationship. A contract that designates an employee as an independent contractor, but in terms of which the employee is in a subordinate or dependent position, remains a contract of service. In other cases, employers have claimed that a person who was formally an employee has been “converted” into an independent contractor. If the person has previously performed the same or similar work as an employee, this is a very strong indication that they remain an employee. Likewise, the fact that other employees employed by the same employer or by other employers in the same sector, to perform the same or similar work under similar conditions are classified as employees may be a factor indicating the person is an employee.
It is consistent with the purpose of the LRA and other labour legislation to classify as employees, workers who have agreed to contracts purporting to classify them as independent contractors. The fact that a person provides services through the vehicle of a legal entity such as a company or a closed corporation does not prevent the relationship from being an employment relationship covered by labour legislation. It is necessary to look beyond the legal structuring to ascertain the reality of the employment relationship and determine whether the purpose of the arrangement was to avoid labour legislation or other regulatory obligations. However, where a person has made representations to an agency such the South African Revenue Services that they are not an employee in order to gain tax benefits, it may be appropriate for a court or arbitrator to refuse to grant them relief on the basis that they have not instituted the proceedings with “clean hands”.
In the initial decision to adopt the “dominant impression” test, the then Appellate Division listed six (6) factors to distinguish a contract of employment from a contract for services concluded by an independent contractor. These factors, which are frequently cited in judgments, are outlined below and discussed in turn. These six (6) factors are not a definitive listing of the differences between the two types of contracts.
Rendering of personal services –
In terms of common law, an employee renders personal services, while an independent contractor is contracted to produce a specific result. An employee is contracted to work and the labour itself is the object of a contract of employment. An independent contractor is contracted to deliver a completed product and the result of the labour is the object of the contract. An individual engaged to perform specified work may nevertheless be an employee if other aspects of the relationship sufficiently resemble an employment relationship. This may be the case, for example, if the employee is required to perform the specified work personally and under close supervision by the employer.
The employee must perform personally –
A key defining feature of an employment relationship is that the employee is required to perform services personally when required to do so by the employer. This has been described by the courts as the employee being “at the back and call” of the employer. An independent contractor need not perform the services personally and may use the services of other people unless the contract expressly provides otherwise. Accordingly, a contractual provision requiring a contractor to perform personally does not always mean that the relationship is one of employment. Similarly, the fact that an employee may be permitted or required to arrange a substitute during absence does not in itself imply they are an independent contractor.
The fact that a person employs, or is entitled to employ, other people to assist in performing the allocated tasks will not always be inconsistent with an employment relationship, although it is an indication that the relationship is one of independent contracting. In some sectors of the economy, it is a practice for sub-contractors to be engaged to work and required to recruit other workers to assist them. This requirement does not in itself exclude the sub-contractors from the possibility of being classified as employees. It will still be necessary to examine the relationship between the principal and sub-contractor, as well as the relationship between the principal and the persons engaged by the sub-contractor, to ascertain if the relationship is one of employment. Depending upon an examination of all the factors, including, for instance, the extent of control exercised by the principal sub-contractor, it is feasible that both the sub-contractor and the workers that they have engaged may be employees of the principal contractor. A relevant factor would be the extent to which the employer exercises control over the decision to terminate the services of persons engaged by the sub-contractor.
The employer may choose when to make use of the services of the employee –
The courts conventionally state that an employer has the right to determine whether to require an employee to work, while an independent contractor is bound to perform or produce as specified by the contract. An employer will however, in most circumstances, be liable to pay an employee who renders their services, even where the employer does not require the employee to work.
Employer’s right of control –
An employee is subject to the employer’s right of control and supervision while an independent contractor is notionally on a footing of equality with the employer and is bound to produce in terms of the contract. The right of control by an employer includes the right to determine what work the employee will do and how the employee will perform that work. It can be seen in an employer’s right to instruct or direct an employee to do certain things and then to supervise how things are done.
The employer’s right to control is likely to remain, in most cases, a very significant indicator of an employment relationship. The greater the degree of supervision and control to be exercised, the greater the probability that the relationship is one of employment. The right of control may be present even where it is not exercised. The fact that an employer does not exercise the right to control and allows an employee to work largely or entirely unsupervised, does not alter the nature of the relationship.
A court may conclude that a contract of employment exists even if the employer exercises a relatively low degree of control because of the presence of other factors in the relationship that are indicative of employment. In some cases, particularly in the case of workers with high levels of skills or occupying senior positions within a company, the normal indications of control may not be present but nevertheless, the relationship may be one of employment because, for instance, of their degree of integration into the employer’s organisation.
Termination of contract on the death of employee –
The fifth of the original characteristics suggested that a contract of employment terminates on the death of an employee, while the death of an independent contractor does not necessarily terminate the relationship. It has been observed that this distinction may be of limited value as the death of an individual who is an independent contractor may terminate the relationship.
Termination of contract on the expiration of the period of service –
The sixth characteristic is that a contract of service terminates on the expiration of the period of service while a contract of work terminates on the completion of the relevant work or task. Again, this distinction is of very little practical value in dealing with difficult issues. It is not uncommon for the life of a contract of employment to be defined by references to a project on which an employee is engaged.
Other characteristics of a contract of employment –
The six (6) factors listed are not an exclusive list of factors that should be considered when assessing whether an employment relationship exists. The factors in section 200A of the LRA and section 83A of the BCEA that form part of the presumption of employment also serve as a useful guide to be used in the process.
A number of other considerations that may be relevant to determining whether an employment relationship exists in particular cases are –
Remuneration and benefits
A worker’s remuneration and benefits may assist in determining their employment status. The fact that an employee received fixed payments at regular intervals which are made regardless of output or result tends to be a strong indication of an employment relationship. This type of payment regime would generally be inappropriate for persons who are genuinely self-employed.
Likewise, the fact that a person is a member of the same medical aid or pension scheme as other employees of the employer is an indication that they are an employee. Other factors which may be indicative of an employment relationship are –
a) The inclusion in a contract of payments in kind for items such as food, lodging, or transport;
b) The inclusion in a contract of provision for weekly rest periods and annual leave will usually be consistent with an employment relationship;
c) The provision of benefits that are designated towards years of service with their employer.
Many employees receive variable payments that depend on their performance, such as commissions or bonuses based on productivity, attendance, or other factors. The receipt of variable payments in this form is not inconsistent with an employment relationship. The fact that an employee does not receive a conventional salary or wage package or does not have the same medical aid or pension fund as other employees, should not be relied upon as the only basis for deciding that they are or are not an employee.
It is not inconceivable that a remuneration package can be structured to create an appearance of an independent contracting relationship that is at variance with the underlying nature of the employment relationship. However, the manner and method of payment may be one factor along with others that lead to a conclusion that a person is not an employee.
Provision of training
The provision by an employer of training in the employer’s methods or other aspects of its business is generally an indication of an employment relationship. Usually, a genuinely self-employed person would be responsible for ensuring their own training. However, the provision of training as part of a contractual arrangement is not necessarily inconsistent with a relationship of independent contracting.
Place of work
The place at which work takes place may sometimes be taken into account as a factor determining the nature of an employment relationship. However, great caution needs to be taken in using this factor. The fact that a person works regularly at the employer’s premises and has no other place of work can be an indication of an employment relationship. However, this might not be the case where the work is of such a nature (for instance, repairs to machinery or equipment) that it has to be performed at the employer’s premises or if the contractor leases premises from the employer independently of its contract for work or services. The fact that a person does not work at the employer’s premises is not necessarily inconsistent with an employment relationship. It is conceivable that homeworkers, working from their own premises or those of fellow employees, are employees because of factors such as the extent of control that the employer exercises over the matter in which they work.
The determination by a court or tribunal as to whether a person is an employee, or an independent contractor has an important consequence. In particular, independent contractors are not afforded the protection of labour legislation.
Courts, tribunals, and officials must determine whether a person is an employee or independent contractor based on the dominant impression gained from considering all relevant factors that emerge from an examination of the realities of the party's relationship.