Employed or Not? Comparing Employees and Independent Contractors

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It has been said that the traditional model of employment is moribund. With factors such as the entry of millennials into the employment market and technological advancements, employers have increasingly found themselves having to re-invent their employment models. The most prevalent change has been the shift from hiring fully-fledged employees to engaging independent contractors/consultants. It would seem that millennials have slightly different ideals of employment than older generations, with millennials valuing independence and flexibility over stability and job security. This phenomenon has been termed as the “gig economy” which is the growing preference for temporary or short-term engagements.

However, millennials are not solely responsible for the paradigm shift as employers too have sought to engage more independent contractors, or consultants, in a bid to minimise their responsibilities. The question that therefore arises is whether the line between an employee and an independent contractor is clearly demarcated. The South African Labour Guide gives the following quote:

Employers must clearly understand exactly how the Act defines “an employee”. Many employers sit back smiling, falsely believing that all the people who work for them are not employees – so the employer has successfully circumvented the Act. “They are not employees – they are all independent contractors!! It is time to smell the coffee!!”

As aptly put in the quote above, it is vital to distinguish between employees and independent contractors, more so with the disruption of traditional employment models. A person’s status as an employee or an independent contractor could mean the difference between an employer incurring or avoiding liability for acts done by the person.

In the case of South African Broadcasting Corporation v McKenzie (CA8/98) (1998), the South African Labour Appeal Court was of the opinion that the legal relationship between the parties must be deduced primarily from a construction of the contract which they concluded and from the realities of the relationship between them and not simply from the way the parties chose to describe it, so the Court has to give effect to what the relationship really is and not what it purports to be.

Similarly in the Kenyan case of Fredrick Byakika v Mutiso Menezes International Unlimited (2016) eKLR , the Employment and Labour Relations Court (ELRC) found that the use of the terms such as salary, employment terms and conditions, summary dismissal do not, by themselves, confer an employment relationship. The Courts would have to look into factors such as the intention of the parties, to determine whether they give rise to an employment contract or that of an independent contractor.

In Dewhurst v Citysprint UK Ltd ET/2202512/2016, the Central London Employment Tribunal held that it matters not how many times an employer proclaims that he is engaging a man as a self-employed contractor; if he then imposes requirements on that man which are the obligations of an employee and the employee goes along with them, the true nature of the contractual relationship is that of employer and employee.

In the Kenyan case of Maurice Oduor Okech v Chequered Flag Limited (2013) eKLR, the ELRC found that in determining the existence of an employment relationship, the Court is expected to go beyond mere terminologies employed by the parties either in their pleadings or in their testimony. The Court is called upon to inquire into the entire spectrum of facts and circumstances to establish whether an employer/employee relationship as defined in the Employment Act, 2007 (the Act) actually exists.

Kenyan law distinguishes between an employee (contract of service) and an independent contractor (contract for service). A contract of service is one that creates rights and responsibilities between parties to an employment relationship, whereas a contract for service implies that a person is self-employed where the work is under their own terms, as against a person who is employed and is under specified terms with legal protection and defined remuneration. The issue of whether there is a contract of service or a contract for service is one that can be established in law or in fact but also noting that most independent contractor contracts are not written, the facts of each case are paramount and worth consideration as to the intentions of the parties to such a contract.

Section 2 of the Act defines an employer as, “any person, public body, firm, corporation or company who or which has entered into a contract of service to employ any individual.” The Court in Stanley Mungai Muchai v National Oil Corporation of Kenya (2012) eKLR , held that under section 2 of the Act 2007, a contract of service is a necessary ingredient in the definition of employer. The Act defines a contract of service as, “an agreement, whether oral or in writing, and whether expressed or implied, to employ or serve as an employee for a period of time, and includes a contract of apprenticeship and indentured learnership.”

Courts have held that there is a thin line between an employee who is under an employment contract or under a contract of service as against an employee who is employed under a contract for service. The employment contract/contract of service entails an employee undertaking work with rights and duties for specified remuneration, while a contract for service indicates independence, lack of control and an employee who is not integrated into the workforce of an employer for purposes of acquiring certain rights and responsibilities.

Factors to consider in determining the existence of an employment contract include; the degree of control exercised by the employer; whether the worker’s interest in the relationship involved any prospect of profit or risk of loss; whether the worker was properly regarded as part of the employer’s organisation; whether the worker was carrying on business on his own account or carrying on the business of the employer; the provision of equipment; and the incidence of tax and national insurance and the parties’ own view of their relationship. Independent contractors are normally given the contract for service for specific periods while the employment contracts provide for long-term contracts with direct services being provided by the employee.

There are also specific tests employed to determine the status of the relationship. These include:

• The control test whereby a servant is a person who is subject to the command of the master as to the manner in which he or she shall do the work
• The integration test in which the worker is subjected to the rules and procedures of the employer rather than personal command. The employee is part of the business and his or her work is primarily part of the business
• The test of economic or business reality which takes into account whether the worker is in business on his or her own account, as an entrepreneur, or works for another person, the employer, who takes the ultimate risk of loss or chance of profit
• Mutuality of obligation in which the parties make commitments to maintain the employment relationship over a period of time

Courts have however cautioned that the tests are not to be used exclusively by themselves as they only serve as guides based on the facts of each case. The hallmarks of a true independent contractor are that the contractor will be a registered taxpayer, will work his own hours, run his own business, will be free to carry out work for more than one employer at the same time, will invoice the employer each month for his/her services and be paid accordingly and will not be subject to usual “employment” matters such as the deduction of PAYE (tax on income), will not get annual leave, sick leave and other normal entitlements of an employee.