A flexible and contingent workforce offers several advantages, but there are also inherent risks in flexible staffing solutions.
A recent global survey by Wired Consulting and Baker McKenzie found that one of the legal risks facing companies is the misclassification of workers.
Johan Botes, partner and head of the employment and compensation practice at Baker McKenzie, says unscrupulous companies use “independent contractors” but they are in true form employees.
Legislation can ‘see through’ contracts
Our legislation, as in many other countries, caters for the rights of employees. It is able to see through the nature and form of a contract in terms of which a person appears to be an independent contractor but is in substance an employer-employee contract.
“A company using independent contractors always has the risk that those independent contractors could be classified as employees and could acquire employee rights in circumstances where the company thought it had no employer-employee obligations,” says Botes.
This means a company could be faced with Unemployment Insurance Fund, Pay-As-You-Earn tax and unfair labour practice issues.
Legal and reputational risk
“Besides the legal risks there is also public opinion and reputational risk where companies are accused of abusing people in order to avoid their obligations as an employer,” adds Botes.
The main difference between an independent contractor and an employee is whether the person makes “productive capacity” available, or whether they provide an output or a service.
Companies are advised to be very sanguine and clear as to why they want to make use of a specific resource. If it is to limit their legal risk, it generally leads to problems.
“If you have a true business need to use independent contractors, then do so, but make sure that your business processes treat them as such,” says Botes.
Employee or contractor?
According to the South African Labour Guide there are several factors that determine whether a person is an employee, regardless of the form of the contract.
This includes whether: the person is subject to the control or direction of another person; the working hours are subject to the control or direction of another person; the person has worked for that other person for an average of at least 40 hours per month over the last three months; the person is economically dependent on the person to whom they are offering a service or goods; and whether the person uses tools of the trade (such as computers) that are provided by the person to whom they are rendering the service or supplying goods.
Botes says that if the underlying rationale is to label someone as an independent contractor because the company does not want the ‘hassle’ of having to fire an employee, it will inevitably end in tears.
Recent amendments to the Labour Relations Act show more active regulation of non-standard employment (staff employed through labour brokers and fixed-term contract employees).
Disputes likely to increase
The local employment tribunal has seen a number of disputes arising from these statutory amendments where workers demanded equal treatment when compared with others doing similar work, says Botes.
“And as the flexible workforce gathers momentum, we can expect these types of disputes to increase,” he adds.
Regulators, union groups and the court of public opinion are closing in on companies seeking to use freelancers merely to lighten their taxes and worker obligations, says Wired Consulting in an article published on its website.
“Don’t conflate outsourcing with flexibility. Forward-thinking companies will be clear about how they classify and categorise their workforce, and what problem they are trying to solve, while maintaining visibility over internal and outside resources.”
Technology a double-edged sword
Botes also refers to the risks associated with companies’ desire to create a ‘frictionless environment’, where obstacles that cause retardation and unnecessary waste of energy are removed.
Technology is seen as the major remover of many of these obstacles, but it can also result in a bombardment of communication that can cause burnout or employee disengagement.
Botes says there is a plethora of communication platforms available. However, it is important to be very conscious of the underlying business need that the company is trying to address when new technology is introduced.
It may be necessary to create active barriers that will prevent additional communication platforms from being formed since any additional platform detracts from the “attention capital” that people require to remain efficient.