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CMS Support Services (Pty) Ltd v Briggs (JA7/96) [1997] ZALAC 2 (12 May 1997)

.RTF of original document

IN THE LABOUR APPEAL COURT OF SOUTH AFRICA
(HELD AT JOHANNESBURG)

Case no: JA7/96

In the matter between:

CMS SUPPORT SERVICES (PTY) LTD            Appellant

and

BRIGGS AL                                                              Respondent

_____________________________________________________________________
JUDGMENT
_____________________________________________________________________

The sole issue in this appeal is whether the respondent, Mrs Anne Laura Briggs, was employed by the appellant, CMS Support Services (Pty) Ltd.

The respondent instituted proceedings in the industrial court in terms of sec 46(9) of the Labour Relations Act, act 28 of 1956 (“the Act”) in which she alleged that she had been an employee of the appellant, that she was dismissed by the appellant, and that the dismissal constituted an unfair labour practice. In reply, the appellant took the point in limine that the industrial court had no jurisdiction to determine the dispute as the respondent had not been an employee of the appellant. The respondent alleged that the only contract which it concluded with the respondent was a consultancy contract in which she represented a close corporation, Modern Computer Systems CC (“MCS”), that the parties to that contract were the appellant and MCS, that both the appellant and MCS gave effect to the consultancy contract, and that the appellant lawfully terminated the consultancy contract.

By agreement between the two parties, the point in limine was decided first. It was conceded by the appellant that if the respondent was an employee of the appellant, that the appellant had committed an unfair labour practice.

The respondent gave evidence. The appellant did not call any witnesses.

The industrial court found in favour of the respondent. The court held that the consultancy contract was “farcical” and a “sham”, that the true agreement was one between the appellant and the respondent, and the relationship between the appellant and the respondent was an employment relationship.

The appellant appeals against those findings.

The facts are largely common cause.

The respondent had previously worked for Economic Data Processing (“EDP”), which had the agency for CINCOM software. The appellant acquired EDP and with it, the CINCOM agency. The respondent was thereafter employed by the appellant until she resigned in 1988.

On 10 July 1986 MCS was incorporated as a close corporation. The sole member of MCS was the respondent. The principal business of MCS was described in the founding statement as “sales and servicing of computer hardware and development and sales of computer software”. The respondent said she registered MCS “as a way of being able to pay less tax as a married woman”.

On 10 January 1991 the Johannesburg Stock Exchange (“JSE”) and MCS, represented by the respondent, concluded a written contract in terms of which MCS agreed “... to provide services to the information services division of the JSE in addition to procuring the employment [of the respondent] in rendering the services specified in this agreement to the JSE”. The JSE undertook to pay MCS a fee of R 62,9 per hour, payable in equal monthly instalments in arrears on the 25th day of each calendar month. The hourly rate took into account the value of the normal employee benefits (which were not included in the contract) such as transport allowance, mortgage bond subsidy, pension fund contribution and medical aid contribution.

The background to the conclusion of the contract between the JSE and MCS was given in evidence by the respondent. JSE could not retain its professional staff, presumably because the remuneration it paid its employees was not competitive. In order to increase the real value of the remuneration, a scheme was devised to avoid the payment of personal income tax. So, instead of the JSE concluding a contract of employment with members of the professional staff, it concluded a contract with a close corporation of which the applicant for employment was the sole member.

In early 1992 the respondent was contacted telephonically by Mr A Jardine, of the appellant, who indicated that the appellant wished to employ the respondent. An initial interview was held with Mr M McRoy. The second interview was conducted by Mr G Breytenbach. Breytenbach told the respondent that the appellant wanted to employ her “as an ordinary employee”. The respondent requested, instead, that the appellant conclude a contract with MCS. In her words, “I requested that I be paid in a similar fashion to the way I have been paid at the JSE for tax purposes only. ... Mr Breytenbach asked me what was the purpose of my intent - why did I want to do it that way and I said the sole purpose was for tax benefit and as far as I was concerned I was an ordinary employee and the only - the benefit of being employed through the CC would have been to have a tax benefit, because of the tax burden on married women at the time.” Breytenbach undertook to discuss the respondent’s proposal with his senior director, Mr J Wapenaar. He subsequently telephonically informed the respondent that the appellant would accede to her request.

In terms of the appellant’s standard contract of employment the company operated a mandatory pension fund for all its employees, to which the employees were obliged to contribute 7,5% of the basic salary before tax. Membership of the medical aid scheme was compulsory unless an employee was covered by a recognised medical aid scheme. The respondent added in evidence that a further motivation for not becoming an employee of the appellant was that she did not wish to belong to a medical aid scheme as she was covered by her husband’s medical aid and she did not want to be compelled to belong to the appellant’s pension fund as she had made adequate provision for a pension.
On 30 April 1992 “a consultancy contract” was concluded between the appellant and MCS. The relevant terms of that contract are the following:
“1.       SCOPE
MCS will provide CMS with the services of Mrs Anne Laura Briggs for the support of CINCOM products and other software as required.
2.       TERMS OF WORK
Work will be done on a part time basis with an average maximum of 150 hours per month. This maximum may vary from time to time with the mutual agreement of both parties.
On an annual basis, this maximum of 150 hours will apply to 11 months of the year, to allow for a period of vacation.
A monthly time sheet will be submitted at the end of each month to cover that month’s work.
All secretarial services, manuals and other documentation required for Mrs Briggs to carry out her required function will be provided for by CMS.
3.       REMUNERATION
Remuneration is calculated on an hourly basis at R 85,00 (Eighty Five Rand) per hour.
Payment to be effected within seven calendar days of presentation of invoice. An invoice will be presented monthly for work done during the preceding month.
4.       DURATION OF CONTRACT
This contract is effective from 1 May 1992 and remains in effect until terminated by either party by the giving of one calender month’s notice.

6.       HOURS OF WORK
Mrs Briggs is to be available for consultation on behalf of CMS during normal office hours unless agreed otherwise. CMS operates on a 40 hour, 5 day week, Mondays to Fridays from 07:00 to 17:00.
Any consultation required outside of these hours will be by the mutual consent of both parties.
7.       AVAILABILITY OF SERVICES
The supply of consulting services covered by this contract is to have priority over any other contracts entered into between MCS and any other parties.
Mrs Briggs is to have transport available at all times to allow her to consult with the various customers of CMS as required. Periods of routine servicing of her vehicle are excluded from this condition.”

The consultancy agreement came into effect on 1 June 1992.

Three persons worked in the CIMCOM division of the appellant: Jardine, the managing salesman, the respondent and Mr K Hefer, who performed the same tasks as the respondent.

Hefer was employed by the appellant in terms of a contract of employment. That contract was in keeping with the appellant’s standard employment contract. In terms of Hefer’s contract of employment, he was paid R8000,00 per month, paid monthly in arrears; he received a car allowance and an entertainment allowance; he was entitled to 18 working days leave per annum; he was required to join the appellant’s pension fund and he was obliged to make contributions to the fund; and membership of a medical aid fund was optional. In terms of the appellant’s standard employment contract, a person was employed by the company on a probational basis for the first three months, during which time the employee or the appellant could terminate the employee’s services with 24 hours notice.

On 19 June 1992 a publication, Computing SA, published a photograph of the respondent and Hefer with the news that they had each been appointed “product specialist at CIMCOM Product Support CMS.”

The hourly rate which MCS received was increased to R93,50 in August 1993. The rate was not subsequently increased.

Until December 1993 the respondent and Hefer worked with the CINCOM computer software system. In that month the appellant acquired the agency for White Cross computer software. Thereafter the respondent and Hefer worked on both systems. The appellant lost the CIMCOM agency in April 1994. The respondent subsequently worked with the White Cross system.

On 30 June 1995 the respondent was handed a letter addressed to MCS in which MCS was given one calender months notice of cancellation of the consultancy contract

During the period 1June 1992 to 28 February 1993 the respondent prepared an invoice each month in the name of MCS for the amount of hours worked and the appellant paid MCS in terms of the invoice. For example, on 29 June 1992 MCS claimed payment of the sum of R11985, 00 (141 hours at R85,00 per hour). The appellant paid MCS the full amount. No amount was deducted for income tax. Neither MCS nor the respondent paid any income tax during that period.

In February 1993, Ms S Cockshott, the personnel manager of the appellant, informed the respondent that in terms of a change to the Income Tax Act the appellant was obliged to deduct 48% as income tax of the amount due to MCS. To avoid a deduction of that magnitude the respondent was advised to seek a directive from the receiver of revenue. The respondent, or her tax advisers on her behalf, requested a directive from the receiver of revenue. Neither the respondent nor her tax consultant informed the receiver of revenue of the fact that the respondent was employed by the appellant. After receiving a directive from the receiver of revenue, from 1 March 1993 the respondent submitted an invoice to the appellant on the letterhead of MCS in the following form:
“Contracting services of Anne Briggs March 1993.”
The appellant then paid the respondent the amount claimed by her less an amount payable for income tax in terms of the receiver of revenue’s directive. For the year 1 March 1993 to 28 February 1994 an amount of R28547,14 was deducted in respect of her gross remuneration of R158595,00. For the following tax year an amount of R29686,28 was deducted in respect of her gross remuneration of R148431,00. Had the respondent disclosed to the receiver of revenue that she regarded herself as an employee, the probabilities are that the receiver would not have issued the directive and would have required her to pay PAYE and SITE on a considerably higher tax rate.

The respondent’s income tax returns were prepared for her by tax consultants, Protax CC. The respondent signed the returns. In the returns the occupation of the respondent was given as “freelancer”. Her remuneration was described as “fees”.

In the income tax return for the period 1 March 1993 to 28 February 1994, from the gross remuneration of R158595,00 a deduction of R53292,96 was claimed on the basis that various expenses were incurred. Included in the expenses were claims for computer equipment, a photostat machine, accounting fees, entertainment, office furniture, refreshments, stationary, and “trade gifts”. In the income tax return for the period 1 March 1994 to 28 February 1995, from the gross remuneration of R148431,00 a deduction of R63179,25 was claimed for similar expenses.

The industrial court found in favour of the respondent with this line of reasoning. The court accepted that in terms of the consultancy contract the appellant contracted with MCS, not the respondent; that the respondent represented to the receiver of revenue that she was not an employee; that as a result she paid less income tax than she would have paid had she alleged that she was an employee; that on the documentation, prima facie, the “dominant impression” was that the respondent was not an employee. In spite of those findings, the court held that on the respondent’s evidence, she and the appellant “intended” that she should be an employee of the appellant; that as the appellant had not led evidence to controvert that of the respondent, her evidence had to be accepted as proof of an employment relationship; that the consulting contract was “farcical” and that the appellant “wants its cake and eat it” in that “willingly and without much difficulty [it was] enticed into the so-called independent contractor sham to secure her services of a person they hand picked. However, when the respondent’s circumstances changed and they did not need the applicant anymore, they relied on the “sham” or farce agreement without going through the painstaking process of a retrenchment. That I believe should not be condoned.”

The consultancy contract was not a sham.

The respondent had been an employee of the appellant prior to 1988. She was aware of the advantages and disadvantages of being an employee. She registered MCS, a close corporation, with the express purpose of creating a means to reduce her tax burden. By paying less tax, she increased her disposable income. In 1991, when she joined the JSE, it suited her and the JSE to use MCS as a vehicle to avoid the payment of tax by her. The respondent did not contend in evidence that the contract MCS and the JSE concluded was a sham nor did she contend that she was in reality an employee of the JSE.

On being interviewed by Breytenbach, the respondent insisted that she did not want to be an employee of the appellant, despite the willingness of the appellant to employ her. The respondent is obviously an intelligent person, who was capable of assessing what was in her best interests. She decided that she did not want to be an employee. The short term financial advantages were appealing: she would not have to pay income tax and she could not be compelled by her employer to contribute 7,5% of her salary before tax to a pension fund. Her disposable income, accordingly, would be much greater. A disadvantage of not being an employee was that she would not enjoy the rights conferred on an employee by the Act, including the right not to be dismissed unfairly.

Having weighed up the advantages and disadvantages, the respondent made an election. She elected not to become an employee. Instead she elected to enjoy the advantages that a contract between the appellant and MCS would give and to forfeit the advantages of being an employee. What followed the respondent’s election was the consultancy contract, a contract concluded between the appellant and MCS, a juristic person distinct from its member, the respondent. And at no time did the respondent conceded that the consultancy contract was a sham. On the contrary, at all times, including in the witness box, she insisted that it was a valid and binding contract. She could hardly contend alternative, of course, or she would be liable to pay the income tax on the basis that she was an employee, and having misrepresented the true position to the receiver of revenue, she would be liable for penalties.

On conclusion of the consultancy contract, the parties gave effect to its provisions. They conducted themselves as if bound to its terms.

The respondent at no time prior to the termination of the consultancy agreement contended that she was an employee of the appellant. On the contrary, on numerous occasions she represented to the receiver of revenue that she was not a employee. It was on the basis that she was not an employee, that she paid no tax for the first nine months of the duration of the consultancy contract. When the receiver of revenue was asked for a directive in about February 1993, she did not inform him that she was an employee. Thereafter she was described in her income tax returns as a “freelancer” and her remuneration as “fees”. Had the respondent believed that she was an employee of the appellant, she had a number of opportunities to disclose that fact to the receiver of revenue. It is naive, of course, to have expected the respondent to have done so. What is worse for the respondent is that she never attempted to regularise the position with the appellant. Had she done so, the appellant would have insisted that he sign its standard employment contract, one of the consequences of which have been that PAYE would have been deducted from her wages and another would have been that a deduction would have been made as a contribution to the appellant’s pension fund.

Immediately after the conclusion of the agreement the respondent enjoyed the benefits of the consultancy contract:-
a)       For the first nine months, neither the respondent nor MCS paid income tax on MCS’ earnings. The respondent’s financial position may be compared with that of Hefer. His remuneration package was structured in such a way that his taxable income was R8000 per month. For that nine month period, on a gross income of R72 000, he would have had 36% deducted as PAYE, ie R26 000. It is that amount - at least - which is the measure of the benefit the respondent received by not being an employee of the appellant.
b)       In accordance with the directive from the receiver of revenue (on a representation by the respondent that she was not an employee), the appellant first deducted 20% and later 17% of the monthly amount paid to the respondent as income tax. For the tax year 1 March 1993 to 28 February 1994 the appellant deducted the amount of R29 686 from the total amount earned of R158 595. On assessment by the receiver of revenue, an additional R8 000 income tax was payable. The total amount of income tax paid for that year was R37 000, in round figures. Had the respondent been an employee of the appellant, she would have paid 36% tax on her income, ie R52 722,52. By not being an employee, the respondent was about R15 700 better off.
c)       Because the respondent was not an employee of the appellant, she could claim expenses as a deduction. In one year her claim was for R53 292,56 on an income of R15 8595 and in the following year her claim was for R63 179,25 on an income of R14 8431. It follows that her taxable income was considerably less than it would have had she been taxed as an employee.

The industrial court should not have attached any weight to the respondent’s ipse dixit that she (and the appellant) intended that she should be an employee when the documents signed by her, her representations to the receiver of revenue, and her conduct throughout the duration of the consultancy contract, were inconsistent with such a intention. On the common cause facts, there was no case for the appellant to meet.

The nature of the relationship between the appellant and the respondent is primarily to be determined by reference to the contract concluded by them at the commencement of their relationship: Borcherds v CW Pierce and J Steward t/a Lubrite Distributers (1993) 14 ILJ 1262 (LAC) at 1277H-I; Liberty Life Association of South Africa Ltd v Niselow (1996) 17 ILJ 673 (LAC) at 683D-E. There was no contract concluded between the appellant and the respondent in her personal capacity. The contract which was concluded was the consultancy contract and that was an agreement between the appellant and MCS.

The remarks of Bulbulia DP in a similar case of Callanan v Tee-Kee Borehole Casings (Pty) Ltd and another (1992) 13 ILJ 1544 (IC) at 1550 D-E are apposite: “The court accepts that the applicant formed his close corporation in a bona fide belief that it will assist him in easing his tax burden. It has not appeared that it was his express intention to defraud the fiscal authorities. Having said that, I must also point out that the applicant cannot have his proverbial cake and eat it. He cannot say that he was not the respondent’s employee as a machinist for purposes of taxation (or for wishing to avoid the pension scheme of the industrial council), but simultaneously be regarded as an employee for the purpose of the Labour Relations Act.” See, too, Apsey v Babcock Engineering Contractors (Pty) Ltd (1995) 16 ILJ 914 (IC) 924D-F.

The appeal is upheld, with costs.

The determination of the industrial court is altered to read: “The point in limine is upheld.”
_____________Myburgh JP

Froneman DJP,
Nicholson JA
concurred.

Date of Hearing                    :                 97/05/12
Date of Judgment                           :                 97/05/12

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