If an employee becomes a contractor, does that make him independent?
16 July 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: Our client has
a current employee who does IT and admin work for them from an African country
(normal employee on their payroll). They now want to rather have the employee
invoice them (and possibly still pay him via payroll) and he will then be
managed by the client’s IT service provider.
He will have the option to do IT work for other clients as well BUT I
have an idea that he will work mainly for my client and his main source (or all
of his) remuneration will come from my client.
Our labour attorney
said that his application at SARS will fail for Independent Contractor if he
only has one source of income.
What is legal and possible tax-wise?
Will his pay be able to run through payroll or
is it better to pay him via normal finances (on his invoice)?
What is the risk involved?
A: We remind you
that the service offered by SAIT is limited to guidance only.
We submit that whether or not it is "run through payroll” or
it paid "via normal finances (on his invoice)” is irrelevant. It is the true nature of the agreement that
will determine whether or not the payment is made to an employee.
At issue is whether a "trade carried on by him (or her)
independently of the person by whom such amount is paid or payable and of the
person to whom such services have been or are to be rendered…”
The current practice generally prevailing in this regard is
set out in Interpretation Note 17. The
note deals with the statutory tests (including how to apply the statutory
tests) and common law dominant impression test.
The table on page 23 is very useful.
Judge Streicher, in the Niselow case, said that "…an
employee is a person who makes over his or her capacity to produce to another;
an independent contractor, by contrast, is a person whose commitment is to the
production of a given result by his or her labour…" The judge then concluded by saying that the
relationship between the parties must remain one in terms of which the person
doing the work undertook to produce a certain result and not to render personal
services to person paying for it to be a contract in terms of which independent
services are rendered.
Disclaimer: Nothing in this query and answer should be construed as
constituting tax advice or a tax opinion. An expert should be consulted for
advice based on the facts and circumstances of each transaction/case. Even
though great care has been taken to ensure the accuracy of the answer, SAIT do
not accept any responsibility for consequences of decisions taken based on this
query and answer. It remains your own responsibility to consult the relevant
primary resources when taking a decision.