COFESA, Contractors, and contracts of employment

COFESA, Contractors, and contracts of employment

Determining the existence of a contract of employment has always been difficult. Over the years, the courts have developed several tests to assist them in identifying a contract of employment as opposed to a contractual relationship of another form. These tests have included the control test, the organisational rest and the dominant impression test. Of all of these tests, the dominant impression test is the one that has gained most currency, although some doubts have recently been expressed about its usefulness.

The courts have recently had occasion to consider the terms of a so-called independent contractors agreement concluded by employers with the assistance of an employer's organisation, the Confederation of Employers of South Africa ("COFESA").

In both instances, the courts held that despite the wording of the contract, the true relationship was one of employment and that the contracts were a sham. The first case, Building Bargaining Council (Southern and Eastern Cape) v Melmons Cabinets CC & another (2001) 22 ILJ 120 (LC), concerned a dispute between the bargaining council and Melmons, a manufacturer and installer of cupboards.

Melmons had persuaded the majority of its hourly paid employees to resign and to enter into a standard form of contract supplied by COFESA in terms of which they purportedly became contractors, who provided services to Melmons for an indefinite period. The bargaining council alleged that the so-called contractors were employees, and subject to the bargaining council agreement.

The Labour Court in the course of review proceedings, had to decide on the nature of the relationship between Melmons and the "contractors". Judge Landman noted that the definition of an "employee" in section 213 of the Labour Relations Act specifically excluded an independent contractor from its ambit.

The Labour Court used as a starting point the terms of the contract of employment between Melmons and a particular "contractor", a Mr Mawa. The contract envisaged a sophisticated relationship in terms of which the contractor was obliged to deliver certain specified services to his "client". The contract contained indemnities in respect of claims from the Receiver of Revenue, VAT, accident insurance, regional councils, etc. It also provided for the letting and hiring of office/factory space, and entitled the contractor to employ other persons to assist him provide the services that he is required to provide in terms of the agreement.

An examination of the reality of the situation revealed a relationship of an entirely different nature. The "services" that the "contractor" was required to provide included cleaning cupboards sing a rag and thinners. The equipment and/or tools referred to in the agreement and the undertaking to keep that equipment washed and cleaned according to the manufacturer’s specifications related to equipment that was recorded to comprise "een sak lappe, een besem, vyf liters thinners".

The court noted that while the agreement recorded that Melmons was a client of the contractor this was nothing less than "a cruel hoax" perpetrated on Mr Mawa. This had been done with the assistance of COFESA. While Mr Mawa believed that he was a self-employed entrepreneur earning more than he did as an employee, he was blissfully ignorant of his newly acquired obligations and the loss of his rights and privileges as an employee. The court concluded that the agreement that purported to be an independent contract/principal relationship "is a sham and it remains a sham even though Mr Mawa has consented to it". In truth, Mr Mawa is an employee and Melmons is his employer. The court concluded that Melmons was required to comply with the bargaining council's collective agreement and ordered Melmons to pay the costs of the proceedings.

The second case, this time decided in the Natal Provincial Division of the High Court, concerned a similar contract and a claim for payment of levies by a bargaining council on the basis that certain persons described as "independent contractors" were in fact employees.

While the court noted as a general rule, the legal relationship between the parties must be gathered primarily from a construction of the contract which they conclude, this is not the end of the matter. The court is always entitled to discover the true relationship between the parties, and to have regard to the realities of that relationship despite what the parties have decided to call it. In other words, a label is of no assistance if it is used to disguise the real relationship between the contracting parties.

In this instance, the COFESA agreement entitled "independent contractor memorandum of agreement" did not, stated the court, necessarily mean that that is the substance of the contract.

After an examination of the terms of the contract and a review of the evidence, the court found that "the contract is not only a subterfuge but a bizarre one, designed to strip the workers of the protection to which they are entitled according to law and fair labour practice and to place the worker at the mercy of the defendant".

The court had no hesitation in concluding that the persons described as contractors were employees in terms of the definition of employee in the Labour Relations Act and not independent contractors. The company was ordered to pay the council's costs, including the costs of two counsel.

The clear lesson to be drawn from these decisions is that the High Court and the Labour Court will not hesitate, in appropriate instances, to look behind the form of a contract between two parties to establish the real relationship between them. In other words, the form of any agreement in terms of which one party agrees to provide services to another must yield to substance when the true relationship is one of employment.

The abuse of the definition of "employee" contained in the current legislation has led to a series of amendments both to the Labour Relations Act and the Basic Conditions of Employment Act. In terms of the Amendment Bill adopted by the National Council for the Provinces on 28 February 2002 and likely to become law before mid-2002, if a party is able to establish any one of seven factors, that person will be presumed to be an employee for the purpose of the relevant Acts, unless that presumption can be rebutted. The factors are broadly expressed and will in practice, be fairly easily satisfied.

Employment is presumed if any one or more of the following are present:

>> The manner in which the person works is subject to the control or direction of another person

>> The person's hours of work are subject to the control or direction of another person

>> In the case of a person who works for an organisation, that person forms part of the organisation

>> The person has worked for the other person for an average of at least 40 hours per month over the last three months

>> The person is economically dependant on the other person for whom she or he works or renders services

>> The other person provides the person with the tools of trade, or work equipment

>> The person only works for or renders services to one person

It should be recalled that the establishment of any one or more of these factors does not definitively establish an employment relationship. It is simply an evidentiary device, intended to assist parties to establish a relationship of employment. The definition of "employee" both in the LRA and the BCEA remain unaffected by the amendment.

While it can be appreciated that the creation of a presumption of employment was necessary to combat the subterfuges perpetrated by organisations such as COFESA, the far-reaching nature of the amendments might be questioned in the light of the courts clear inclination to intervene and to expose disguised contractual relationships for what they are in reality. Be that as it may, the nature and extent of the factors on which the existence of an employment relationship will now be argued will inevitably mean that the employer party will be on the defensive in virtually each instance where the nature of a contractual relationship to provide services is challenged.

* Perrott, Van Niekerk, Woodhouse & Matyolo Inc. as a service to Caselaw.co.za users, produce Caselaw summaries.

Postscript

Since the Building Bargaining Council (Southern and Eastern Cape) v Melmons Cabinets CC & another(2001) 22 ILJ 120 (LC), cases, Section 200A was introduced to the Labour Relations Act by Act 12 of 2002.

This amendment gave clear and comprehensive guidance regarding the status of employees and contractors. The amendment supersedes previous rulings.