There really is no specific definition of ‘Independent Contractor’.
According to the common law, the concept is merely another word for “Entrepreneur” or “Employer”, whereas according to the South African law traditionally, it refers to contract of locatio conductio operis. This term includes three types of transactions namely; The letting and hiring of things (Hire-purchase/lease), the letting and hiring of service (Employer-Employee) and the letting and hiring of work (Independent Contractor).
Over and above it, it is important for an employer to determine whether a person is an employee or an independent contractor. The liability of an employer to deduct employee tax is dependent on whether remuneration (as defined in paragraph 1 of the Income Tax Act) is paid, therefore, amounts paid to an independent contractor for services rendered are excluded in remuneration as defined.
Two sets of tools are available in determining whether a person is an independent contractor for employees’ tax purposes; the Statutory tests and Common law test. The statutory test includes two parts and are both conclusive in nature.
If the first test (statutory) is met, the person is deemed not to be carrying on a trade independently, with the result that the amount paid is deemed to be “remuneration” and will be subject to employees’ tax, UNLESS the second test is met.
Where the second test (common law) is satisfied, the person will be deemed to be carrying on a trade independently, and the amount earned will not be “remuneration” as defined and will consequently not be subject to employees’ tax.
On the statutory test, the first part is that the services or duties are required to be performed mainly (more than 50%) at the premises of the client. This refers to the premises of either the person by whom the amount is paid or payable; or to whom such services are rendered or will be rendered.
An example of these persons are waitrons receiving tips or labour brokers. This means that if the services are rendered mainly at the premises of either of these parties, who are not necessarily the same persons, this part of the statutory test is satisfied.
The second part of the statutory test is whether the worker is subject to the control of any other person as to the manner that the worker’s duties are or will be performed, or as to the hours of work; or supervision of any other person as to the manner that the worker’s duties are or will be performed, or as to the hours of work.
With regards to the second tool, common law tests; a person who employs three or more full-time employees who are not connected persons in relation to him or her and are engaged in his/her business throughout the particular year of assessment, is deemed to be carrying on a trade independently.
The common law test has a common law dominant impression test which makes use of several indicators, of differing significance or weight that have to be applied in the relevant context, namely; near-conclusive (those relating “most directly to the acquisition of productive capacity”); persuasive (those establishing “the degree of control of the work environment”); and resonant (of either an employer-employee relationship or an independent contractor or client relationship, whichever is relevant).
This test is essentially an analytical tool that is designed for application in the employment environment to establish the dependence or independence of a person.
The near-conclusive indicator is nearly conclusive because the indicators are considered to be the deciding factors in distinguishing between the acquisition of the worker’s productive capacity (employee) as opposed to the result (independent contractor).
This indicator looks at the control of the manner, the person who must render the service, nature of obligation to work and the risk, profit and loss. Whereas the persuasive indicator looks at the instructions or supervision as well as training; and the resonant indicator looks at the tools, materials, stationery, office or workshop and termination and breach of contract.
It is possible that a person could meet the first test (statutory), and be deemed not to be carrying on an independent trade, but meet the second test (common law) and then be deemed to be carrying on an independent trade. The second test overrides the first test.
It is important to also note that if you are an independent contractor, no PAYE (employee’s tax) must be deducted from your income. You need to register for provisional tax and will be responsible for your own tax affairs. The “local business” Income section of your ITR12 is to be used to declare your incomes/expenses.
