Employed or self-employed? Key characteristics of an employment relationship

It is important to distinguish between employment and running a business, because the existence of an employment relationship is a fundamental requirement for being covered by labour legislation that has been enacted to protect workers. PAM has dealt with several disputes where unpaid wages claimed by a worker were contested on the grounds that the counterparty it was not a case of an employment relationship.

It is important to distinguish between employment and running a business, because the existence of an employment relationship is a fundamental requirement for being covered by labour legislation that has been enacted to protect workers. If in legal terms it is something other than an employment relationship, labour legislation cannot be applied.

Chapter 1, Section 1 of the Employment Contracts Act includes a definition of an employment contract. This states that the Employment Contracts Act applies to contracts (employment contracts) entered into by an employee, or jointly by several employees as a team, agreeing personally to perform work for an employer under the employer’s direction and supervision in return for pay or some other remuneration.

Content

Five key characteristics of an employment relationship
Contractual relationship and performing work
Performing work for an employer
Remuneration for work
Performing work under the employer’s direction and supervision

Five key characteristics of an employment relationship
Based on the law, therefore, the five key characteristics of an employment relationship are:

1. a contract
2. performing work
3. performing work for another party
4. remuneration
5.  being under direction and supervision, i.e. the employer’s right to direct.

The concept of an employment contract in the Employment Contracts Act is binding law. The parties to a contract or a collective agreement cannot validly agree that the Employment Contract Law does not apply to a contract that fulfils the characteristics set out in the law.

Contractual relationship and performing work
When making an employment contract, it does not have to conform to a prescribed form; it is a legal action with a free format. According to Chapter 1, Section 3 of the Employment Contracts Act, an employment contract may be oral, written or electronic. An employment contract may also be made tacitly. If an employer allows an employee to work for him or her, an employment contract is deemed to have been concluded tacitly.

The one performing the work, the physical person, makes a personal commitment in the employment contract to perform work. An employment contract applies to the performance of work, not the outcome of work. Working can be active or passive activity, such as being a model  for example. Contracts exclusively for the outcome of work are generally entrepreneurial agreements.

The personal nature of the obligation to perform work is laid down in Chapter 1, Section 7 of the Employment Contracts Act, which states that the parties to an employment contract may not assign their rights or obligations under an employment contract to a third party without the other party’s consent. An employee, therefore, may not transfer his or her obligation to perform work to a third party unless the employer consents to it.

Performing work for an employer
An employment contract is an agreement to perform work for an employer. As a condition of the employment relationship, the direct benefits of the work accrue to the employer. If an employee performs work for his or her own benefit, for example building a house for his or her family, the relationship is not that of an employment contract and no employer’s obligations arise. In legal practice this characteristic of an employment relationship has mainly had to be considered in assessing whether a person is performing work in a company on the basis of a holding or an employment contract.

Remuneration for work
One element of an employment relationship is the employee’s share of the remuneration paid for the work. The remuneration is generally money, but may also be various benefits in kind together with monetary pay. For the compensation paid for work to be considered as remuneration, it must have a financial value for the recipient.

Even though remuneration is a fundamental element of an employment relationship, application of the law does not require that payment of it has been specifically agreed. The Employment Contracts Act contains a presumption of remuneration. Under the Employment Contracts Act, the law applies even if remuneration has not been agreed if it is evident from the facts that the work is not intended to be performed without remuneration.

If there is disagreement about the remunerative nature of work, the employer is required to prove that the work was intended to be performed without remuneration. The amount of the agreed remuneration may be relevant in assessing whether the work is intended to be performed in an employment relationship or as a self-employed person. If the agreed remuneration significantly exceeds the remuneration generally paid for the same work, this could indicate that the work is intended to be performed on a self-employed basis.

Performing work under the employer’s direction and supervision
The employer’s right of direction and supervision is in practice the most important of the elements of an employment relationship, because ultimately the existence of an employment relationship is assessed on fulfilment of this characteristic.

The right to direct includes the right to direct and the right to supervise employers. For the characteristic of an employer’s direction and supervision to be met, there is no requirement of detailed guidance or advice on the content of work.

In legal practice it has been considered that the right to direct and supervise is alone sufficient to meet the characteristic of an employment relationship. Even if for example performance of work requiring special expertise is often so independent that in practice an employer’s de facto ability to direct and supervise the work is limited, this does not mean that work with independent power of decision cannot be performed in an employment relationship