Employee or Contractor? Courts will give effect to Contractual Terms

In the recent matter of Vermooten v Department of Public Enterprises & Others (JA91/2015) [2016] ZALAC 63 (14 December 2016) the Labour Appeal Court affirmed that in the absence of overriding policy considerations, neither a tribunal such as the CCMA nor a Court may ignore the terms of a contract.

By Neil Coetzer, Partner, Employment Law, Benefits & Industrial Relations, Cowan-Harper Attorneys

In 2006 Dr Vermooten applied for the position of Director: Aviation following an advertisement by the Department of Public Enterprises. During the interview, Dr Vermooten indicated that he could not accept the remuneration that was offered. Due to the Personnel and Salary System, which prescribes rates of remuneration in the public service, the Department was not able to increase the salary offered to Dr Vermooten. Nevertheless, at the interview representatives of the Department indicated that a solution could be found to the problem. Dr Vermooten agreed and suggested that his appointment could be approached as a ‘specialist function’ which would permit him to operate outside the formal structure, similar to other specialists engaged by the Department.

The Department subsequently offered Dr Vermooten a contract as a Specialist Aviation Consultant for a period of 12 months with effect from 9 October 2006. He was advised that this was the only way that the Department could pay Dr Vermooten’s desired salary. As a consequence, Dr Vermooten would be required to submit monthly invoices to the Department, which invoices would then be paid by the Department. Dr Vermooten accepted this contract.

When the first contract expired, he was offered a second contract on the same basis which he accepted.  The agreement was subsequently amended and extended until 31 March 2011. During March 2011 Dr Vermooten was informed that the contract would not be extended any further. Dr Vermooten subsequently referred a dispute to the Bargaining Council alleging that he had been dismissed unfairly.

At the arbitration the Department raised a legal point and made submissions to the effect that Dr Vermooten was not an ‘employee’ as defined in terms of the Labour Relations Act 66 of 1995, as amended (“the LRA”) but led no evidence to support these contentions. After considering evidence led by Dr Vermooten, the arbitrator found in favour of Dr Vermooten, but this was reversed on review by the Labour Court.

Aggrieved by this, Dr Vermooten then appealed to the Labour Appeal Court. The Court considered the evidence led at the arbitration. Dr Vermooten stated that when a consultant is appointed by the Department, a tender process is followed and a bid committee adjudicates the tender before awarding it. This did not happen in respect of his appointment. Dr Vermooten stated that he reported to the Deputy Director-General of the Department of Public Enterprises and that his reports were supervised and edited by him. He was also provided with a 3G card, a cellphone and a computer. Files and staff were allocated to him and he was also required to apply for annual leave. PAYE was also deducted from the amounts paid to him at 25%, but he was not provided with medical aid or pension fund benefits.

Dr Vermooten argued that the Court should pay regard to the substance of the relationship of the parties and not the form of the contract regulating that relationship. While the Court agreed that this was the correct approach, it found that there were two ways in which the Department wished to engage Dr Vermooten’s services, namely as an employee on a contract basis or as a consultant on a ‘different contractual basis’.

The Court found that Dr Vermooten had declined the first option because he was unprepared to accept the proposed remuneration. Dr Vermooten was in a good bargaining position and was able to negotiate an arrangement which permitted him to receive more money. The Court found that although the arrangement was for purposes of avoiding the limitations prescribed by the Personnel and Salary System, this was not an illegal purpose. The Court accordingly found that the parties had deliberately and consciously elected to structure their relationship as one other than an employment relationship. In an important passage, the Court held as follows:-

“[26]     The consultancy agreement was not a sham. Therefore, in the absence of any overriding policy considerations, neither a tribunal nor a court may ignore its terms. Where the parties are in a relatively equal bargaining position and consciously elect one contract or relationship over another, the legal effect should be given to their choice… The appellant seeks to be defined as an employee and so, it seems to me, to achieve what could not be achieved when negotiations began ie to be the Director: Aviation at a remuneration level exceeding double the prescribed remuneration and with the inclusion of all the benefits which were previously excluded by reason of the consultancy agreement. In other words, he wishes to become part of an organisation which could not and still cannot, accommodate him at his desired remuneration level.”

Dr Vermooten’s appeal was accordingly dismissed with costs.

Employers often engage in contractual arrangements which do not precisely define the true nature of the relationship between the parties, leading to disputes as to whether the person is an employee or an independent contractor. It is particularly important for both parties to understand the nature of their relationship and this should be clearly dealt with in the contract which regulates the relationship, as subsequent conduct could create unnecessary confusion and create expectations on the part of both parties.

For more information please contact Neil Coetzer at ncoetzer@chlegal.co.za or (011) 783 8711 / (011) 048 3000

Article published with the kind courtesy of Cowan-Harper Attorneys www.cowanharper.co.za

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