Be cautious, meticulous before entering the contracting game: CRS Technologies
It is a step-by-step process that begins with identifying in which category SA's labour and tax law would officially recognise a person.
While some South Africans believe being a full-time contractor has benefits that surpass those enjoyed by full-time employees, the reality is that both scenarios have advantages and disadvantages, and which option to go for is down to whether it is preferable to have one's own business or to work for someone.
This is according to Nicol Myburgh, Head of HR business unit at leading HR and HCM solutions provider CRS Technologies.
Myburgh says there are several factors that need to be considered when making this decision.
When it comes to independent contractors, they have registered businesses, are paid via invoices instead of a salary, and most certainly enjoy tax benefits.
An independent contractor has flexible working hours, the freedom to work for more than one client and thereby increase revenue, as well as the option to sub-contract work when the pressure is on.
"On the flip side, being an independent contractor, you won't enjoy the same job security as an employee; a client can cancel a contract at any time; the costs of running a business are much higher than just being an employee; and the time requirement to maintain business administration can be a hassle. Income is not fixed, it will always be a variable," says Myburgh.
When it comes to being an employee, there are also several factors to keep in mind.
There are definitely advantages: there is less risk, an employee is far more secure working for an employer; an employee doesn't have to deal with business administration, or much overhead other than monthly transport costs to and from work; and an employee can be assured of earn a certain amount each month and can therefore plan accordingly.
"However, PAYE income tax must be paid, employees must adhere to fixed working hours and may not run any business in their private capacity. Also, an employee cannot subcontract work and must do the job he or she was employed for. When an employee develops a new product or a clever new way of doing things, the employer has the right to that intellectual property, not the employee," Myburgh continues.
CRS Technologies' view is that if one considers the question of whether to work for oneself or work for an employer, there are some legal factors to consider.
For instance, an employer is liable to pay PAYE (income tax) on behalf of employees and this is not the case for independent contractors. Many employers believe they have independent contractors doing work for them, but according to the Income Tax Act, these people are actually considered to be employees, and employers are liable for the tax.
To resolve this, employers can apply the 'dominant impression test', which determines whether a person is an employee or a true independent contractor
"Basically, this test determines whether the onus of control lies with the contractor or the employer. There are several factors that need to be considered, including whether the worker can work for another person, if they are required to devote a specific amount of time to their work, if they are obliged to perform their duties personally, and if they provide their own tools, among others," Myburgh adds.
Gerhard Linde, Senior Tax Advisor at Tax Debt Compliance on behalf of CRS Technologies, expounds on a number of issues that add to the complexity of this area of HR management.
Linde agrees with Myburgh's assertions and adds the concept of an 'independent contractor' remains one of the more contentious features of the Fourth Schedule of the Income Tax Act No 58 of 1962.
"A decision in favour of either independent contractor or employee status impacts an employer's liability to deduct employee's tax," says Linde.
He adds the liability of an employer to deduct an employee's tax is dependent on whether 'remuneration' as defined in paragraph 1 of the Act is paid.
CRS Technologies emphasises that subject to certain conditions, amounts paid to an independent contractor for services rendered are excluded from "remuneration" as defined, in which case an employer has no obligation to deduct employee's tax from the amounts paid.
It is the responsibility of the employer to determine whether the provisions of exclusionary subparagraph (ii) of the definition of "remuneration" are applicable and whether payments are subject to employee's tax as set out by the provision of the Fourth Schedule of the Act.
The debate of how to treat independent contractors and full-time employees is based on how these individuals are verified.
Two sets of tools are available to determine if a person is an independent contractor for employee's tax purposes: the first is referred to as the statutory test, and the second is common law tests.
"Common law tests are used to determine whether a person is an independent contractor or employee. Unfortunately, the common law tests as they apply South Africa do not permit a simple 'checklist' approached. There are no hard and fast rules in determining whether a person is an independent contractor. An 'overall' or 'dominant impression' of the employment relationship must be formed. In practice, the statutory tests are considered first," says Linde.