SP033/04

SOCPOL CIRCULAR NO. 33A/04

CODE OF GOOD PRACTICE: WHO IS AN EMPLOYEE

PART 1

1. This Code of Good Practice is issued by NEDLAC in terms of section 200A(4) of the Labour Relations Act 66 of 1995 (LRA). This Code sets out guidelines for determining whether persons are employees.

Application

2. Part 1 of this Code, which deals with the application of the Code and issues of interpretation, applies to all persons.

3. Part 2 of this Code, which deals with the presumption as to who is an employee found in section 200A of the LRA and section 83A of the Basic Conditions of Employment Act 75 of 1997 (BCEA), only applies to employees who earn less than a threshold amount determined by the Minister of Labour in terms of section 6(3) of the BCEA. This amount is presently R89 455.00 per annum. For the purpose of determining whether an employee falls within this threshold, an employee’s earnings are calculated as gross pay before deductions (i.e. income tax, pension, medical aid contributions and similar payments), but excluding contributions made by the employer in respect of the employee.

4. Part 3 of this Code, which deals with the interpretation of the definition of "employee" as contained in the LRA, applies to all employees and not only to those employees who earn less than the threshold amount determined by the Minister.

5. As the definition in the LRA is identical to that contained in the BCEA, the Employment Equity Act 55 of 1998 (EEA), and the Skills Development Act 97 of 1998 (SDA), the Code applies when determining whether persons are employees for the purposes of those Acts. In terms of section 203(3) of the LRA, section 87(3) of the BCEA, and section 3 of the EEA, any person interpreting or applying those Acts must take any relevant Code of good practice into account.

6. The Code may provide some guidance in order to determine whether persons are employees in terms of other legislation such as the Occupational Health and Safety Act 85 of 1993, the Compensation for Occupational Injuries and Diseases Act 130 of 1993 and the Unemployment Insurance Act 63 of 2001. However in applying these three Acts, it must be borne in mind that the definitions of an employee in those statutes differ from that contained in the LRA.

Issues of Interpretation

7. Section 3 of the LRA provides that any person applying the Act must interpret its provisions –

(a) to give effect to its primary objects;

(b) in compliance with the Constitution; and

(c) in compliance with the public international law obligations of the Republic.

8. In order to interpret the LRA in compliance with the Constitution, a commissioner, arbitrator or judge must interpret its provisions in a way that ensures the protection, promotion and fulfilment of constitutional rights, and in particular the labour rights contained in section 23 of the Constitution . This means that if there are two possible interpretations that may be given to a provision, the decision-maker must choose the interpretation that best gives effect to the Constitution if this does not unduly strain the language of the statute. This is also provided for in section 39(2) of the Constitution which states that "when interpreting any legislation, and when developing the common law or customary law, every court, tribunal or forum must promote the spirit, purport and objects of the Bill of Rights."

9. The Constitutional Court has also confirmed that the common law must be interpreted in a way that develops the common law and ensures that it is consistent with constitutional principles.

10. The Constitutional Court has confirmed that the major source of South Africa’s public international law obligations in respect of labour law are the conventions and recommendations of the International Labour Organisation (ILO). Some ILO Conventions extend the rights contained therein to people who may not conventionally be regarded as employees, including one of the ILO’s core instruments, namely the Convention concerning Freedom of Association and Protection of the Right to Organise, 87 of 1948. This guarantees the right of "workers and employers, without distinction, to establish and join organisations of their own choosing, without prior state authorisation". The Freedom of Association Committee of the Governing Body of the ILO is responsible for hearing complaints about alleged breaches of the principles of freedom of association and has developed a complex jurisprudence on freedom of association. The Freedom of Association Committee has held that the criterion for determining whether persons are covered by Convention 87 is not based on the existence of an employment relationship and that self-employed workers in general should enjoy the right to organise. South Africa has ratified Convention 87 and compliance with its provisions therefore constitutes a public international law obligation. A further example of an ILO Convention which seeks to extend its terms to persons who may not conventionally be regarded as employees, is the Convention on Maternity Protection, 183 of 2000, which applies to all women (including those in atypical forms of dependent work). South Africa has not ratified this Convention.

11. Section 3 of the LRA is an express injunction to interpret the provisions of the LRA purposively. A ‘purposive’ approach to interpretation, considers a statutory provision broadly so as to give effect to the Constitution and to the underlying purpose of the statute. It usually implies a generous interpretation that may take into account the legal history that gave rise to the statute. This approach is in contrast to more literal approaches to interpretation traditionally adopted by South African courts. In terms of the literal approach, courts limit themselves to the precise words used in a statute and only in the event of doubt, allow the common law to inform the text of the statute.

12. When interpreting the provisions of the LRA, including the definition of an employee and the presumption as to who is an employee in section 200A, a court or tribunal must choose an interpretation that best gives effect to the primary objects of the LRA, the provisions of the Constitution, and South Africa’s public international law obligations.

13. Part 3 of the Code examines how the definition of an employee should be interpreted. In doing so, courts must give due regard to -

• the express injunction to interpret the LRA purposively;

• the purpose of the LRA which is to give effect to and regulate the fundamental rights contained in section 23 of the Constitution;

• section 23 of the Constitution is phrased broadly. Subsection (1) provides that "everyone has the right to fair labour practices" and the rights in subsection (2) apply to "every worker".

PART 2

THE PRESUMPTION AS TO WHO IS AN EMPLOYEE

14. The 2002 amendments to the LRA and BCEA introduced a provision into each Act creating a rebuttable presumption as to when a person is an employee. These provisions are found in section 200A of the LRA and section 83A of the BCEA. As indicated in paragraph 3, these provisions only apply to persons with annual earnings of less than the threshold amount determined by the Minister in terms of section 6(3) of the BCEA.

15. The presumption that a person is an employee comes into operation if the employee is able to establish that one of seven factors listed in the provision is present in the relationship with the person for whom they work or render services. Before examining the list of seven factors, it is necessary to describe the general operation of the presumption.

16. The presumption applies in any case in which there is a dispute as to whether the applicant is an employee.

17. For the presumption to come into operation, the person who alleges they are an employee (‘the applicant’) is required to demonstrate two things:

• that they work for or render services to the person or entity cited in the case as their employer;

• that one of the factors listed in either section 200A(1) or section 83A(1) is present in their relationship with that employer.

18. The presumption applies regardless of the form of the contract. Accordingly, the fact that the applicant may have agreed to a term in a contract stating that he or she is not an employee or that he or she is an independent contractor, is not relevant for the purposes of determining whether the presumption comes into play. The person applying the presumption must evaluate evidence as to the actual nature of the employment relationship, and not determine the matter by reference to a statement as to the form that the relationship takes in a contract.

19. The presumption will come into effect if the applicant establishes that one of the following seven factors is present –

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

The criterion of control or direction will generally be present if the applicant is required to obey the lawful and reasonable commands, orders or instructions of the employer or the employer’s personnel as to the manner in which they are to work. This criterion is not present where the person is hired to perform a particular task or produce a particular product and is entitled to determine the manner in which the task is to be performed or the product produced. The fact that an employer is entitled to take disciplinary action against the person (including terminating the contract) as a result of the manner in which the person works is a strong indication of the presence of control or direction;

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

This factor will be present if the person’s working hours are a term of the employment relationship;

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

This factor will apply in the case of an employer that constitutes a corporate entity. It will not apply in situations such as the employment of a domestic worker or in a situation where the employer operates as a "one person" business. The factor will be present if the applicant forms an integrated part of the organisation of the employer. This integration will be evident in different ways such as whether the person’s position is considered in the long-term planning of the company; whether the person’s position appears in company organograms; whether the person attends regular staff meetings and receives circulars or emails directed at staff of the company etc;

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

Where the applicant is still in the employment of the employer, this should be measured over the three months prior to the case commencing. If the employment relationship has been terminated, it should be measured with reference to the three-month period preceding its termination;

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

Economic dependence will be present if the applicant depends upon the employer for the supply of work. Economic dependence relates to the "market" position of the applicant rather than to, for instance, the fact that they depend upon their income for their survival. In general terms, economic dependence will be present unless the applicant is truly independent of the employer. The applicant will be truly independent if he or she is entitled to offer his or her skills to others. Where a person remains entitled to contract his or her services with others at the same time as working for the employer he or she is unlikely to be economically dependent. A person is unlikely to be truly independent of the employer if the person does not assume any responsibility for the risks of failure and the benefits of success. An employee is generally paid a fixed wage or salary regardless of the quality of work while an independent contractor may only be entitled to receive a reduced fee or no fee if there is poor quality work or incompetence. The fact that an employee may receive payments in addition to salary or wages (e.g. an attendance bonus or a bonus dependant on the profitability of the employee) does not remove them from being an employee. An independent contractor who agrees on a fee or price may have to bear the risk of loss if performance costs exceed that fee or price or if there are increases in raw material prices. Employees do not bear any equivalent risk. An independent contractor may make business decisions that directly affect profitability while an employee typically does not make these decisions;

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

This provision applies regardless of whether the tools or equipment are supplied free of cost or their cost is deducted from the applicant’s earnings or the applicant is required to re-pay the cost. The term "tools of trade or work equipment" covers the means by which the applicant performs his or her work and extends beyond tools in the narrow sense to include items required for work such as books;

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

This factor will not be present if the person works in any other manner for or supplies services to another. It is not relevant whether that work is permitted by the relationship between the two or whether it is "moonlighting".

20. If any of the factors listed in the preceding paragraph are established, the applicant is presumed to be an employee. The onus will then rest on the employer to produce evidence to the contrary establishing that the relationship is in fact one of independent contracting. If the employer is unable to produce such evidence or if the evidence is not convincing, the applicant is presumed, for the purposes of the case, to be an employee.

PART 3

INTERPRETING THE DEFINITION OF AN EMPLOYEE

21. The LRA defines an employee as –

"(a) any person, excluding an independent contractor, who works for another person or for the State and who receives, or is entitled to receive, any remuneration; and

(b) any other person who in any manner assists in carrying on or conducting the business of an employer, and ‘employed’ and ‘employment’ have meanings corresponding to that of ‘employee’. "

22. The interpretation given to the term "employee" by the courts prior to the insertion into the LRA of the presumption as to who is an employee, remains relevant. This is so because –

• the presumption only applies to employees who earn less than the threshold amount determined by the Minister;

• for employees who earn less than the threshold amount, evidence may be led to rebut the presumption, and the interpretation given to the term "employee" by the courts will then become relevant. For example, if the person who is alleged to be an employee establishes that he or she has worked for the other person for an average of at least 40 hours over the last three months, there will be a presumption that that person is an employee. The ‘employer’ may, however, lead evidence that that person is an independent contractor engaged to perform a particular task. The court or tribunal will then have to determine whether that person is an employee.

23. The definition of an employee in the LRA includes any person who works for another person and who receives, or is entitled to receive, remuneration or who in any manner assists in carrying on the business of an employer, unless that person is an independent contractor. There is no requirement in the definition that an employee must be employed in terms of the contract of employment.

24. The central determination that a decision-maker is required to make is therefore not whether there is a contract of employment, but whether the person is excluded on the basis that they are an independent contractor. While the presence of a contract of employment will be a clear indication that the person is not an independent contractor, the absence of a contract of employment does not in itself determine that the person is not an employee.

Distinguishing between an employee and an independent contractor 

25. In terms of the common law, the central distinction between an employee and an independent contractor is that an employee renders personal services in terms of a contract of service, while an independent contractor is contracted in terms of a contract of work to produce a specified result. Put differently, an employee is contracted to work (the labour itself is the subject of the contract), whereas an independent contractor is contracted to deliver a completed product (the result of the labour is the subject of the contract). The independent contractor need not perform the service personally but may use the services of other people.

26. In many cases it is easy to apply the above distinction (a full-time and permanent factory worker is clearly an employee, whereas a plumber who comes to a person’s home to fix the plumbing is an independent contractor). There are always, however, cases where the distinction is not easily discernible. Persons applying the Code will be aware that there is an increasing diversity of employment relations. The emergence of what are often referred to as ‘atypical’ forms of employment has increased the difficulty in making the distinction between an employee and an independent contractor. The Green Paper on Labour said the following - "the development of new working arrangements has led to an increasing number of workers being excluded from the protection of labour legislation because of the terms of their contract which do not meet the traditional employment test. Sectors where this is present include home working, transport and agriculture. These workers are potentially subject to extremely exploitative working conditions and are often referred to as ‘dependent contractors’".

27. In South African National Defence Union v Minister of Defence and Another the Constitutional Court indicated that workers who may not be traditionally considered to be employees nonetheless enjoy the labour rights set out in section 23 of the Constitution. As the LRA was enacted to give effect to section 23 of the Constitution, this is an indication that the courts will be inclined to broaden rather than narrow its approach who falls within the definition of an employee, in order to ensure that a greater number of workers enjoy the protections afforded by labour legislation.

The relevance of the contract

28. While the legal relationship between the parties may be gathered primarily from a construction of the contract that the parties may have concluded, courts must seek to discover the true relationship between the parties and must have regard to the realities of that relationship, irrespective of what the parties choose to call their relationship in the contract. Traditionally, the courts have hesitated to look beyond the intention of the parties in determining the validity of an independent contractor contract. Recent judgements, however, have shown a willingness by the courts to look beyond the form of the contract and to determine whether, objectively, the elements of an employment relationship are present. The courts have found that even if two parties agree to enter into a contract that reflects their relationship as one of independent contracting, this may be a sham particularly in circumstances where the independent contractor’s bargaining power was weak or where he or she is still in a subordinate or dependent position in relation to the other party. This shows a tendency by the courts to find that, in the absence of genuine independence, a person is an employee rather than an independent contractor. This is consistent with the purposive approach required by the Constitution and by section 3 of the LRA. 

29. An important factor in determining genuine independence is the extent to which a person is exposed to risk (i.e. the opportunity to enjoy profit or suffer loss). In this regard the comments on the economic dependence of an employee in Part 2 of this Code are relevant.

The dominant impression test

30. In making a determination that a person is an employee, rather than an independent contractor, the courts have generally followed an approach referred to as the "dominant impression test". The essence of this approach is that there is no single factor that decisively indicates the presence or absence of an employment relationship. Accordingly 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. (In this regard, the approach differs from that to be used when applying the presumption as the presumption comes into play if one of the listed criteria is present).

31. It is useful to reflect on the context in which the "dominant impression test" was adopted. It followed a period during which the courts adopted the approach that there was a single definitive indicator of the presence of an employment relationship, namely the employer’s right of control over the employee. However, the courts later accepted that an employment contract can exist in the absence of control and for a while the courts adopted the "organisation test". The central question in terms of this test was whether an employee was integrated into the employer’s organisation. In Smit v Workmens Compensation, the "organisation test" was rejected as "vague and nebulous" and since then, courts have followed the "dominant impression test".

32. The fact that there is no single decisive criterion that can determine the presence or absence of an employment relationship in all cases does not mean that all possible factors must be given the same weighting and an employer’s right of control, in most cases, remains the most decisive indicator of an employment relationship. However, and this is where the application of the dominant impression test is important, the absence of control can never be a decisive indicator that the relationship is not an employment relationship. In many cases, perhaps 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.

33. The right of control by an employer includes the right to determine what work the other person will do and how the other person will perform that work. It can be seen in an employer's right to order an employee to do certain things and then to supervise how those things are done.

34. The seven factors listed in the presumption as to who is an employee should be considered as part of the total mix of factors that a court must consider in determining if a person is an employee. Most of these factors have traditionally been taken into account in such a determination. The one factor that has not been considered traditionally is the factor dealing with economic dependence. As indicated above, the courts have begun to take account of the issue of dependence and independence as a factor in determining whether a person is an employee. It is also appropriate to consider this factor in that its inclusion in section 200A of the LRA and section 83A of the BCEA indicates a legislative intention that this factor is important. The various comments in relation to these seven factors (Part 2 of this Code) are therefore relevant in applying the ‘dominant impression’ test to determine whether a person is an employee or an independent contractor.

35. In addition to these seven factors, practical considerations often play a role in determining whether a person is an employee or an independent contractor. The courts have, for example, considered the following -

• whether PAYE deductions are made;

• whether the person is part of the same medical aid and pension scheme as other employees of the employer;

• whether the person’s remuneration is fixed or whether the person is paid by way of commission;

• whether the person employs, or is entitled to employ, other people to assist him or her in the tasks allocated.

36. The table annexed to this Code as "B" sets out common indicators that may be used in determining if a person is an employee or an independent contractor. The left hand side of the table sets out if an indicator should be regarded as ‘near conclusive’, ‘persuasive’ or merely ‘relevant’.

Conclusion

37. The determination by a court or tribunal as to whether a person is an employee or an independent contractor usually has important consequences. In particular, independent contractors are not afforded the protections of labour legislation and an employer cannot be held vicariously liable for negligent actions of an independent contractor.

38. Courts and tribunals must determine whether a person is an employee or independent contractor based on the dominant impression gained from examining of all relevant factors. Some of these factors, however, are more significant conclusive than others, the most important usually being whether the person is subject to the other person’s control or is in a subordinate or dependent position in relation to the other person. Another crucial indicator is economic dependence which is indicated primarily by whether the employee or independent contractor is exposed to financial risk.

39. Courts and tribunals must look beyond the form of a contract and must make a determination based on the realities of the parties’ relationship. In particular, the genuine independence or dependence of the employee or independent contractor  must be considered.

40. In difficult cases, and particularly in situations where a person is in a weak or subordinate position or is seeking the protection afforded by labour legislation, the definition of an employee must be interpreted generously. This is in line with the purposive approach required by the Constitution and by section 3 of the LRA.

D0357/04