Freelancers – independent or employed? Piercing the corporate veil

By Barbara du Preez-Ulmi. A-typical work relationships that are entered into are usually all sunshine – until expectations are not met, contracts are ended and the parties involved face a legal dispute. It is standard practice to either have an employee contract or an independent contractor’s contract that sets out the terms and conditions of the relationship. Often the two are merged in many weird and wonderful ways.

Labour legislation distinguishes clearly between an independent contractor and an employee (without differentiating between types of employees: temporary, permanent, etc.). But the reality of the workplace often looks different.

Many shades of grey

The advance of a new workplace driven by technology, social and labour changes brings with it the need to re-draft labour legislation globally. But until such is done, we have to use our current legislation in order to regulate work relationships. This often results in employers and individuals creating relationships painted by many shades of grey. Reasons for this are manifold. Sometimes it’s due to salary expectations; sometimes it’s due to tax (evasion); often it’s due to the nature of the new human capital that is driven by project-based work: It allows an individual to stay in control, create a “life-work” balance and invest in going T-shaped. This is basically what we all refer to as consultants or freelancers.

Freelancers who offer flexi, temporary, and Gig work at a client’s workplace have been on the rise. But who is this freelancer? Is he a contractor? Or is she an employee? There are two sides to consider in answering this question: The contract, and the relationship.

Lifting the veil: real-life scenarios

To exemplify: A company seeks to appoint a freelancer for 3 months to work on a project and offers an independent contractor’s contract – not an employee contract. However, they need the freelancer to come to the office every day from 8 till 5, Monday until Friday. The project is clearly defined as to what milestones need to be achieved, how the output will be measured, and when it starts and ends. While usually, freelancers by definition regulate their own working hours, and place of work, this may not necessarily be an issue.

There may be a legitimate need to have a freelancer on site: The work entails confidential information that may not be viewed on a different network than the company’s own; the freelancer may need to collaborate regularly with some of the employees to get the project off the ground; he or she may introduce new processes or set up and train staff on specialist software or machinery – in short, typical independent contract kind of work.

But the reasons may also not be legitimate: The client may want the temporary services of a freelancer without having to add them to the staff roll and pay employee tax, and without having to pay benefits such as medical aid and paid annual leave; yet the client they still wants to be in control of the freelancer’s movements at all time.

Let’s say that after a few weeks, the freelancer takes on another client and needs to be flexible in terms of working hours as agreed on with his first client. The client refers to the contract that stipulates that the freelancer is willing to work on site from 8 till 5 every day. A dispute arises which leaves both parties arguing whether the freelancer is really an independent contractor or an employee, given the fact that the client (“employer”) is in control of the “freelancer’s” time, movement and work output. I will dive more into how the true relationship between the two parties should be weighed up, further below (see “dominant impression test”).

It gets even more interesting if we take the above example, and the company in question seeks to appoint a freelancer for 3 months on an independent contractor’s contract, with the possibility to turn it into an employee contract after the 3 months. Would that not be disguising the true nature of the relationship: That the “freelancer” is actually an employee on probation?

Similarly, let’s look at a situation where the company in question appoints a freelancer for a 3 months project, and the relationship is contractually ended on the last day of the 3 months. At this point, the company approaches the freelancer and asks if he or she would sign another 3 month independent contract at the same conditions (work on site, every day, use company equipment and internet etc.). If this happens once, and it is indeed caused by a necessity to extend the initial project, the employer may get away with it. The question of course still rises as to what the true definition of their relationship is, as the work that the freelancer is performing could easily be defined as an employee’s work (no matter if it’s short term, flexi, part time, long term or permanent).

Projects on-a-roll: when freelance takes on the taste of permanent

Let’s presume the freelancer signed another 3-month contract with “the client”. After the second 3 months, the “client” approaches the freelancer again, with a new proposed contract of limited duration. Or (worse for the freelancer in question), he or she is replaced with another freelancer at the end of the second contract to carry on with the same project – especially if this was not subject to any contractual breach by the first freelancer, or bad performance of services. Both situations reveal that most likely, the “project” is in effect not a project, but a permanent position that needs to be filled by an employee.

In both cases, the freelancer could argue that the true nature of their relationship is actually one of an employer and an employee (and not a freelancer and a client), and if reviewed and accepted by a labour dispute tribunal, she would enjoy protection under the South African Labour Relations Act 66 of 1995 (LRA). Once this is established, one course of action for the “freelancer” would be to argue a case of unfair dismissal in terms of s198 of the LRA, and as amended in 2014.

In my years in management positions, I have also seen employers “convert” a person who was formerly an employee, into an independent contractor. If that person continues to perform the same or similar work as he or she did as an employee, then this is a very strong indication that he or she remains an employee. And if not, this kind of “conversion” may still be fake if other employees employed by the same employer, performed the same or similar work under similar conditions and were classified as employees.

The true nature of a relationship

In South African labour law, an independent contractor cannot take a dispute over an unfair dismissal to any labour tribunal such as the CCMA or bargaining councils because they are not deemed employees. Any dispute would have to be dealt with under contract law, and not labour law. They would have to pursue their dispute resolution action with the civil courts – usually associated with much higher costs.

A freelancer who was donned the coat of an independent contractor by a “client”/ employer and who wants to report unfair dismissal (“discontinuance of their contract”), may however seek assistance from the tribunals if they can prove that the true nature of their relationship with the client/ employer is that of an employee, and not an independent contractor.

In such a case, the courts apply a test called “the dominant impression test”. It is aimed at finding out the true nature of the work relationship, regardless of what the contract says.

The dominant impression

Section 27 of the Code of Good Practice (LRA) and the definition of an employee in s213 of the LRA set the background on which the dominant impression test is applied. This test is often used by the courts to determine the true relationship between two people in the labour or contractual context. The checkpoints below (and as set out in s200 A of the LRA) help draw a conclusion on a balance of probability. The test is created presumption: If one of the 7 criteria is present, the person is an employee, unless the contrary is proven:

The manner in which the person works is subject to the control or direction of another person;
The person’s hour of work are subject to the control or direction of another person;
In the case of a person that works for an organisation, that 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 three months;
The person is economically dependent on the other person for whom he or she works or renders services;
The person is provided with tools of trade or work equipment by the other person; and
The person only works for or renders services to one person.

Note: Currently, and in a South African context, the above listed check-points only apply to a person who earns less than the amount determined by the Minister in terms of the Basic Conditions of Employment Act (BCEA). NEDLAC is in the process of preparing a Code of Good Practice that sets out guidelines for determining whether persons who earn in excess of the ministerial determinations are employees or not.

So what can you do as client or freelancer to avoid disputes?

1- Define your relationship before you write a contract. Be truthful about why you define a relationship as one of employer and employee, or freelancer/ independent contractor and client. Review the dominant impression test when defining your relationship.

2- Consider the consequences for both parties if you enter a grey relationship that is over-shadowed by a contract that may even turn out to be unlawful.

3- Distinguish between contractual and labour relationship: If you as a client work with freelancers and the conditions are the same as for an independent contractor, then by all means declare the relationship independent. But remember you are not in control of their movements – there are only contractual binding conditions for both parties.

4 – A well structured contract is important-especially if you have to prove that the contractor us not an employee. The effect of the contract also needs to be considered: The locatio conductio operis (index con contrac), focuses on the end result (a house, a swimming pool etc), whilst the locatio conductio operarum( e/cont) focuses on the actual work process.

Labourflaws can help you with contract writing should you need assistance.

Want to know more?

If you would like to understand the topic discussed here better, a good way to start is to review publicly available labour dispute case law. An interesting recent case is Vermooten v Department of Public Enterprises & Others (JA91/2015) [2016] ZALAC 63 (14 Dec 2016). This case describes how employers often engage in contractual arrangements which do not precisely define the true nature of the relationship between the parties, leading to disputes as to whether the person is an employee or an independent contractor.

The case which got the discussion around employee vs independent contractor rolling in South Africa, was the case between the South African Broadcasting Corporation (SABC) and McKenzie back in 1998.

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