Page 258 - SAIT Compendium 2016 Volume2

IN 17 (3) Income Tax acT: InTeRPReTaTIon noTes IN 17 (3)
to be the deciding factors in distinguishing between the acquisition of the worker’s productive capacity (employee) as opposed to the result (independent contractor). These indicators are:
9.1.1 Control of manner
This indicator examines the quality (that is, whether intended to acquire control of productive capacity or not), rather than the degree or extent, of control. The employer controls the manner in which work is done either by detailed instructions, by training, by requesting that prior approval be sought by, or by instituting disciplinary steps in the event of unacceptable performance by the worker etc. In this regard:
• Control of manner means control as to which tools or equipment to use, which other workers to involve or employ, which raw materials to use and where to obtain them, which routines, patents or technologies to use etc. All of these are elements of commanding and directing an operation to render a particular business result.
• Where the employer has the contractual power to control the manner of use of a worker’s productive capacity, it is likely that the employer intended to acquire (and the worker acquiesced to the surrender of) productive capacity. However, the absence of this form of control does not mean that there can be no employee relationship. Control is typically present in most employee contracts because control of a person’s manner of working is usually indicative of the right to exercise control over the employee’s productive capacity (whether labourers, blue collar workers, tradesmen on the shop oor or construction site, white collar workers in large open plan of ces, and even of professionals).
• Employment contracts are unlikely to explicitly refer to the acquisition of control of manner. This has to be inferred from the contract as a whole. Any form of control must ow from the legal relationship (the contract) itself and not from some extraneous source (for example, the nature of the trade or profession, of the workplace, or market conditions). It is suf cient if the right of control is contractually present, even if it is not exercised in practice. It is the right to control manner, not the practical ability, which is relevant (for example, a businessman cannot practically control or supervise the manner of working of a specialised professional although the right to do so is retained).
• A right to control ‘manner’ is suf cient to satisfy the statutorily conclusive ‘control’ requirement in exclusionary subparagraph (ii) of the de nition of the term ‘remuneration’. An actual exercise of this right is not necessary.
9.1.2 Payment regime
A worker can be paid with reference to a result (in which the manner of use is not controlled) or to effort (the use of productive capacity in a speci c manner for the payment period). Payment without material reference to result indicates employee status, because the worker is then being paid for effort. It should be noted that:
• The reference to payment for a ‘result’ in a contract may sometimes be misleading. Any employer (business)
incurs employment expenses to achieve ‘results’. An employer expects results from both the employees and the independent contractors it employs. In the case of an employee, the employer controls the employee’s effort to achieve the employer’s result. Generally, the employer cannot apply nancial sanctions (reduce remuneration) if dissatis ed with the employees’ results but can increase control through supervision, training or dismissal for incapacity. In the case of an independent contractor, the employer does not control the independent contractor’s effort, but purchases the independent contractor’s result. If dissatis ed, the employer can only apply nancial sanctions through accepting the result but paying a portion of the contract price, or by refusing to pay or accept the result.
• Payment at regular intervals (whether at a xed rate per time interval or at a xed rate per hour) which uctuates depending on the hours actually worked, but without material reference to output or result for that interval, indicates that there is an acquisition of a worker’s effort (productive capacity), as opposed to a result of effort (productive capacity deployed).
• Payment by time-periods (that is, payment for a result but with the reward merely calculated by time-periods worked) or payment for a service (in the sense of a result) must be distinguished from payment for time (payment for the worker’s effort over time, often measured in hours worked). If the employer is, for example, entitled to a worker’s services for all normal business or working hours, the employer has effectively acquired exclusive use of the productive capacity of the worker, which is indicative of an employee status.
9.1.3 Person who must render the service
An employment contract is one of personal service (that is, the employee is at the ‘beck and call’ of the employer). Where the employer has a contractual right to insist on the personal service of a worker or to object to substitution (for example, the worker substitutes his or her own employee for him or herself), or if the worker may not freely hire, re, pay or supervise his or her own assistants, an employer- employee relationship is usually prevalent. A contractual right to substitute is usually indicative of an independent contractor status.
9.1.4 Nature of obligation to work
A contract where the obligation to work is delineated by time and not result, indicates an employer-employee relationship because it amounts to the acquisition of productive capacity or effort. An obligation to work ‘full-time’ indicates an employer- employee relationship as it means the exclusive acquisition of the worker’s productive hours or capacity. The existence of an obligation to be present and available to work, regardless of whether work is available, indicates that the acquisition of productive capacity was the employer’s foremost consideration, for example, the shop assistant who must be present behind the counter at all times, even if no customers enter the store, is entitled to remuneration until the employment contract is lawfully terminated.
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