Your know-it-all colleague brags about being hired as a contractor rather than an employee – and by now you’ve heard it all.
She blabbers on about being exempt from certain tax burdens, free to work for other employers, and in control of her intellectual property.
Although this may be true, you wonder whether there’s more to it.
This week Justmoney contacted a range of specialists to find out what the benefits are of being a contractor versus an employee.
Benefits of being a contractor
According to Kendall Kotze, candidate attorney at Pike Law, your colleague is right about the benefits she gains from being hired as an independent contractor.
“This allows you the freedom of working for yourself, to create more flexible working arrangements, and it allows you to better manage your tax affairs,” says Kotze.
“You are not bound to an exclusive relationship with one ‘employer’, and the expenses you incur to run your business are often deductible against your income,” she adds.
In one sentence, independent contractors are hired to provide a specific result or outcome, and they are paid for that particular job.
An employee has the structural motivation to succeed because either the employer or team expects results, as they fear dismissal. An independent contractor does not have this as motivation.
“Employees run the risk of hitting a glass ceiling, being limited in career opportunities and generally feeling less in control of upward mobility,” says Kotze.
“Therefore, should you consider yourself to be self-motivated and unencumbered by the idea of ‘selling’ your services to various parties, perhaps you should consider being hired as an independent contractor,” she explains.
Another benefit includes keeping exclusive rights to your intellectual property, such as patents or copyrights.
“An independent contractor usually retains these rights. Depending on your skillset and the services you will be rendering, this could be a major factor to consider,” says Kotze.
What to keep in mind as a contractor
Ellynn Crozier, advocate at Crozier Consulting, points out that employees are often prevented from working for rival companies.
“The employer may restrict an employee's activities during employment and after the employment relationship is terminated,” says Crozier.
Independent contractors are not limited in this way. However, there are some challenges you should consider before making up your mind.
“You may wait long periods of time for a company to pay you after you have completed the work you were contracted to do, and this will negatively affect your cash flow and ability to pay your monthly expenses,” says Crozier.
She explains that you will wear many hats over and above the service you offer to employers, including the management of your own administration, finance, accounting, and marketing.
“You may feel overwhelmed by this if it’s not your core business and you are not well versed in it,” she adds.
A company may also try take advantage of you because you won’t have the same protection and rights as an employee.
“If the company does not pay you for the services you have rendered, you may have to incur legal costs to enforce payment. This can be time consuming and very expensive,” says Crozier.
Employees enjoy protection
According to Crozier, employees are protected under the Basic Conditions of Employment Act 75 of 1997 (BCEA) and the Labour Relations Act 66 of 1995 (LRA).
“The BCEA sets minimum terms and conditions for all employees, with a few exclusions such as unpaid volunteers working for a charity,” explains Crozier.
“BCEA benefits include restrictions on normal working hours and overtime hours, and access to annual leave, sick leave, family responsibility leave, and maternity leave,” says Crozier.
The LRA, on the other hand, aims to promote social justice and labour peace in the workplace.
“It regulates the resolution of disputes between employers and employees, as well as the relationship between employers and trade unions,” says Crozier.
In addition, employees are also protected against harassment and discrimination in terms of the Employment Equity Act (EEA) 55 of 1998.
“Having a continuous period of employment with the same employer creates benefits for the employee. For example, they are entitled to severance pay,” says Crozier.
The good and bad of being an employee
Bernard Reisner, executive director of Cape Labour & Industrial Consultants, outlines the following advantages of being hired as an employee:
- An employee has a regular, fixed income.
- An employer cannot dismiss an employee at will but must go through a fair pre-dismissal process, which the employee can challenge at the CCMA, appropriate Bargaining Council, or Labour Court.
- Some employers will provide benefits, such as pension or provident funds, medical aid, and tools and equipment to enable the employees to perform their job.
On the other hand, he points out the following disadvantages experienced by employees:
- They have stipulated hours, which may be inconvenient.
- They must work at designated premises, which may require considerable travelling to and from work – at the employee’s expense.
- They are subjected to the rules or regulations of an employer which may be rigidly and rigorously applied.
- There are some cases where the manager is not professional and could even victimise employees or discipline them disproportionately.
What about taxes?
One of the main benefits of contract work is the reduced taxes.
According to Mari-Louise Stoltz, professional accountant at MOI Financial Services, employees must be loaded onto the company payroll system, Pay as You Earn (PAYE) must be deducted, and they need to be supplied with their annual tax forms (IRP5).
Besides this, employees are also liable to pay towards the Unemployment Insurance Fund (UIF), as well as a Skills Development Levy (SDL).
“This is not a requirement when using an independent contractor. They are allowed to claim certain expenses incurred against their income received if it’s work related,” says Stoltz.
“They will be required to register as a provisional taxpayer and will be responsible for managing and paying their own taxes,” she adds.
Further to this, depending on their income level, contract workers might be required to register for Value-Added Tax (VAT) which brings on additional accounting requirements,” she explains.
As a result of being exempt from certain tax requirements (UIP, SLD, etc.), contractors also forfeit any benefit from these funds.
Contractors treated as employees
Certain companies and employees believe they can mutually benefit from a contractor-employer relationship, and they decide to file their paperwork as such.
In terms of taxes, Stoltz explains that if a company incorrectly registers an employee as a contractor, the company may be liable to costly terms of interest and penalties.
Kotze adds to this by pointing out that companies are increasingly using independent contractors to optimise work performance and reduce workforce costs.
“A major risk for companies when contracting independent contractors is that in certain circumstances the law treats contractors as employees,” says Kotze.
“The bottom line is that SARS will not regard someone as an employee simply because he or she issues you with an invoice.
“There are many good business reasons to use contractors, but they are not a simple way to escape tax and labour law compliance requirements,” Kotze insists.
Test to find out which you are
Wikus van Vuuren, legal officer at Labour Man Consultants, points out that recent amendments to the Labour Relations Act (specifically Section 200A) clarify whether someone is an employee or not.
“In order to make the determination, the arbitrator or judge will look at the reality of the relationship between the parties,” says van Vuuren.
This will be done according to various tests established in past cases. The following from Section 200A creates a rebuttable presumption as to whether or not an employment relationship exists:
- 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, the person forms part of that organisation;
- The person has worked for that other person for an average of at least 40 hours per month over the last 3 months;
- The person is economically dependent on the other person for whom he or she renders services;
- The person is provided with tools of trade or work equipment by the other person; or
- The person only works for or renders services to one person.
Nicol Myburg, head of Human Resource Business Unit at CRS Technologies, agrees that many employers incorrectly believe they have independent contractors working for them.
“To resolve this, the employers can apply the ‘Dominant Impression Test’, which determines whether a person is an employee or a True Independent Contractor,” says Myburg.
“Basically, it determines whether the onus of control lies with the contractor or the employer,” she explains.
In the test, the following factors are considered:
- the right to supervision;
- the dependence of the worker on the employer in the performance of duties;
- whether the worker can work for another person;
- whether the worker is required to devote a specific time to his work;
- whether the worker is obliged to perform his duties personally;
- whether the worker is paid according to a fixed rate or on commission;
- whether the worker provides his own tools; and
- whether the employer has the right to discipline the worker.
You can’t eat the cake too
According to Daniel Van Zuydam, associate at Dommisse Attorney's, the basic principal that should always be considered is whether the agreement reflects the factual relationship.
“If a person behaves like an independent contractor, then it is probably best that they are hired as one. If the person behaves like an employee, then it is best that they are employed as an employee,” says Van Zuydam.
“There are a number of legal risks associated with creating a contract to make a person look like one thing, when they are actually another,” he explains.
“Of particular risk is the trend of hiring a person as an independent contractor when, looking at the circumstances, they are actually an employee,” he adds.
Van Zuydam points out that for employers, this carries a significant tax risk, and that all the other obligations that come with hiring an employee would apply.
An alternative to hiring an employee as a contractor would be to tailor a work contract in a way that allows liberties contractors have.
“However, there are still limitations, like the fact that you would not be able to charge whatever you wanted for your services,” says Van Zuydam.
He concludes that you simply can’t have your cake and eat it. You need to decide whether you are an employee or a contractor, and then enter into the appropriate agreement for that role.