Is your company a TES or Service Provider?
Employers often make use of providers to perform certain services or tasks. However, often these triangular business relationships cause confusion in the workplace, especially in the identification of the real employer. Employers may have legitimate business interests to make use of independent contractors, but upon a closer look one finds that these independent contractors do nothing more than providing employees to work for the client company.
In practice it can be challenging to identify and separate the veil in terms of the real relationship between a company, its service providers and that of the employees. What are the guiding principles in determining whether your contractor is considered a genuine independent service provider or a TES (Labour Broker).
In David Victor & 200 others vs Chep SA & C-Force, the 201 employees were employed by C-Force, to repair wooden pallets for CHEP SA. The employees referred a dispute to the CCMA in which they sought a declaration deeming them to be employees of CHEP in terms of Section 198A (3)(b) of the Labour Relations Act and consequently be entitled to equal treatment in terms of Section 198A (5) of the Labour Relations Act (LRA).
A labour broker that hires out labour is considered to be a ‘temporary employment service’ (TES) as defined in Section 198 of the LRA as follows:
‘any person who, for reward, procures for or provides to a client other persons
- Who perform work for the client, and
- Who are remunerated by the temporary employment service’.
Typically, a TES is considered the employer of the employee, however, both the TES and its client are jointly and severally liable if the TES contravenes a binding collective agreement, wage determination or arbitration award, or the provisions of the Basic Condition of Employment Act. Additional protections were inserted during 2014 in the form of Section 198A, which only applies to employees earning below the earnings threshold. In terms of Section 198 A (1), ‘temporary services’ mean work for a client for a period not exceeding three months.
In addition, Section 198 A (3) (b) provides that an employee provided by way of a TES who earns under the threshold and for a period longer than three months, is deemed to be the employee of the client company and not the TES, on an indefinite basis. In casu, the applicant employees first have to establish whether the initial employer is indeed a TES.
CHEP SA hires out pallets, which are used for the storage and transportation of goods in the logistics industry. These pallets require conditioning, repairs, and refurbishment. In 2009, CHEP and C-Force concluded a service level agreement in relation to the maintenance of the pellets. The SLA provides that C-Force is appointed as an independent contractor. In terms of the SLA, C-Force is obliged to 1.) render pallet conditioning services to CHEP at its premises, 2.) to attend to the staffing and management of the plant at which the pallets are conditioned, 3.) to ensure that it employs sufficient adequately trained staff to render the pallet conditioning services, 4.) to properly supervise and manage its employees, 5.) to condition a specified number of pallets, 6.) to supply and maintain small tools, 7.) to man and operate the plant during specific working hours, 8.) to meet certain production volumes and to conduct quality audits in conjunction with CHEP.
The fee payable by CHEP to C-Force is calculated based on the number of pellets conditioned by C-Force. In addition, the SLA specifically records that C-FORCE is appointed as a service provider and that the relationship between CHEP and C-FORCE is one of client and independent contractor. In terms of the SLA, CHEP determines production levels and provide all raw materials, necessary plant equipment and consumables. CHEP also reserved itself the right to request that any C-Force employee be removed from site should they not comply with the SLA and C-FORCE must ensure that these employees cease providing services to CHEP. From a management perspective, C-FORCE also employed the supervisors who was responsible for supervising the employees in the performance of their duties.
The Commissioner at the CCMA confided himself to first determine whether C-Force was a TES, and if it was, to set the matter down for arbitration in terms of Section 198D to deal with the issues of equalisation. The employees argued that C-FORCE was indeed a TES as it provides labour to CHEP, providing work for the client that determines the methods of work, monitor and controls the work performed by them. The Commissioner ruled that C-FORCE was indeed a TES ito Section 198 (1) of the LRA.
The Commissioner considered three critical issues, 1.) the nature of the SLA, 2.) the degree of control exercised over C-Force by CHEP and 3.) the degree C-Force was integrated into the business of CHEP. There was no evidence submitted that C-Force owned a repair facility and on the face of it they were merely supplying staff to CHEP who happens to repair pallets. The Commissioner further argued that if C-Force were a service provider, the work it performed would not be integrated to the extent that it did, but will only be an accessory to the CHEP business. C-Force does not enjoy discretion as to how the work is to be performed. The SLA granted no latitude to C-Force to achieve what is required by CHEP. As such, the Commissioner concluded that CHEP exercises overall control over the activities of the employees.
CHEP challenged the Commissioner’s ruling at the Labour Court alleging that the Commissioner committed gross irregularities and made decisions that were unreasonable and irrational, committed material errors of law resulting in him misconstruing the true nature of the dispute and asking the wrong question. CHEP argued that the definition in Section 198 (1) of the LRA prescribes only three requisites for a person to constitute a TES, namely: 1.) the procurement or provision of personnel to a client for reward, 2.) such personnel must be remunerated by the TES and 3.) such personnel must render services or perform work for the client. According to CHEP before a service provider is considered a TES, its personnel must be placed at the behest of the client as opposed to the provision of a specific output, product or result. Likewise, the services are to be rendered to the client and not the TES, with the TES merely playing a passive role in relation to the services provided.
CHEP further contended that the Commissioner misdirected himself by having regard to the degree of control exercised over C-Force by CHEP and to the degree C-Force was integrated into CHEP’s workplace. These considerations do not form part of the definitional elements of a TES set out in Section 198 (1) of the LRA. The Commissioner thus asked and answered the wrong question. The labour court accepted and agreed with the view of CHEP and argued that the SLA specifically provided for the delivery of a specified product and it can thus not be said that C-Force was providing CHEP with ‘other employees’ or that it placed workers with CHEP.
On appeal, the employees contended that the labour court erred in interpreting the relevant provision of the LRA with insufficient regard to their protective and social purpose. They contended that the LRA was amended in 2014 in order to address the abusive practices associated with labour broking.
The Labour Appeal Court explained that it is common cause that C-Force was remunerating the employees. The question to be decided then is whether C-Force, for reward, procured or provided the appellants to perform work for CHEP. The court argued that this involves consideration of various relevant factors, with no single factor being decisive. A purposive interpretation giving effect to the objects of the legislative policy and the protective provisions is required.
The Labour Appeal Court found that the Labour Court’s finding that C-Force did not provide CHEP with ‘other employees’ because the SLA specifically provided for the delivery of ‘repaired wooden pallets’ takes insufficient account of the fact that CHEP is essentially responsible for the appellants’ working conditions, its control over the manner of work and its residual power to discontinue their services. The Appeal Court stated:
“ C-Force did not ‘deliver’ repaired wooden pallets; its employees, under CHEPS’ supervision, refurbished the pallets at CHEP’s premises, using raw materials and equipment supplied by CHEP.”
And
“The labour court’s reasoning that a TES relationship cannot exist where workers are involved in the provision of a service on behalf of a business to a client, beyond merely supplied as labour, is too restrictive an interpretation, which would allow contractual manipulation of triangular employment arrangements to avoid the provisions of Section 198A of the LRA too easily, thereby undermining the protective purpose of Section 198A of the LRA.”
Where workers are brought to the client by a third party to perform work at its premises, such normally will be at least an indication that the workers were procured to work for the client, especially if the client retains overarching control over the work process and can determine whether a worker continues to perform his or her work at all. In terms of reward, the Appeal Court found that there are no reasons why the reward payment to a TES cannot be calculated by reference to a task or product. All that Section 198 (1) of the LRA requires is that workers be provided to a client for reward and that the worker be remunerated by the provider. The method for computing the reward payable by the client to the provider is not alone sufficient basis to exclude the provider from the TES category. The substance of the arrangement is more definitive than the form.
In this case, it is clear that the reward paid by CHEP to C-Force was in substance driven primarily by the labour costs of refurbishing the pallets. The requisite element that the persons procured for reward and provided to a client ‘perform work for the client’ entails and examination of the substance of the relationship between the client and the workers. The Appeal Court stated:
“Questions of control and integration, including the manner in which the workers work; the authority to which they are subjected; the degree they are integrated into the functioning of the organization; and the provision of the tools of the trade and work equipment are relevant (possibly the only) factors in deciding if procured persons ‘perform work for the client”.
Where a client contractually controls the overall work process or persons who work at its premises, as well as their conduct and behaviour, such persons ordinarily will be deemed to work for the client.
The Appeal Court overruled the order of the Labour Court.
What we learn from this case is that ultimately the principle of ‘substance over form’ prevails in assessing the real nature of the tripartite relationship between a client, provider, and the employees. Even though no factor is definitive, typically a provider will be regarded as a TES in circumstances whereby the client exercises control over the employees, upholds the right to terminate service of employment, provide the tools of trade, determine the conditions of employment and rewards the provider, substantively, for persons provided.
It is advisable for employers to ask for the assistance of a professional Labour Relations Specialist when facing employment law difficulties. Tobie Nel is the Managing Director for Effectus Harmony (Pty) Ltd and has over 15 years’ experience in Labour Law. You can contact him, by phone: 0824479512, by email: [email protected]