COVID-19: Business Right-sizing and Statutory Obligations

COVID-19: Business Right-sizing & Statutory Obligations

Businesses across the world have been severely affected by the COVID-19 pandemic. And while many governments have put together packages to tide the most affected sectors through this very difficult time, there is no doubt that some businesses will simply not survive this period.

1000
Victor

Chief Operating Officer and Risk Management Partner

KPMG in Nigeria

Email

Related content

Back home in Nigeria, many companies are expectedly developing their survival strategies. Business rationalization, especially right-sizing the workforce is an item that is on the table, either for immediate implementation or for implementation in the not too-distant future. Naturally, contract staff are the first set of staff considered for lay-off, as the services they provide are deemed non-core to the business.

Some companies are considering converting some of their permanent staff to ‘contract staff’ in the hope of reducing compliance cost of statutory requirements. Therefore, some companies have managed this by outsourcing the provision of contract staff to a third party company (which therefore takes on the statutory obligations of an employer for such workers), while others have simply engaged some of the workforce as ‘contract staff’ and on that basis, considered themselves absolved of the duties that an employer owes an employee.

The reality, however, is that it is more complicated than that. The first question that needs to be answered is whether the contract is a “contract of service” or a “contract for service”. Afterall, even the so-called permanent staff are employed under “contract”.
A contract of service (also known as employment contract) is one between an employer and an individual who then becomes an employee. The Black’s Law Dictionary defines an employee as “a person who works in the service of another person (the employer) under an express or implied contract of hire, under which the employer has the right to control the details of work performance”. This infers that there is a scope of employment within which the employee performs his obligations.

A contract for service on the other hand, is defined by the online Law Dictionary as “a deal for a work taken upon by anyone who is self-employed. He or she is free to employ others to complete the job, he or she will be the only one responsible for completing it in a satisfactory manner”. This implies that the independent contractor is not under the control of the service benefactor, but he is responsible for delivering the service as requested.

From the above, the determination of whether a contract is “of service” or “for service” is a matter of fact and not necessarily what type of contract the parties say they have.

Some of the conditions that are evaluated in determining the type of contract that is in operation are:

  • Where the individual is subject to the control of the contracting party, he is likely to be deemed an employee while where an individual works autonomously and is not subject to such control, he is likely to be an independent contractor.
  • When a contracting party determines the details of an individual’s work and specifies the conditions of the work, the individual is more likely an employee. However, if the individual is only obligated to provide the finished/completed product to the contracting party, he is more likely to be a contractor.
  • When the contracting party provides the required materials or training needed by the individual to perform his service, he is typically seen to be an employee. On the other hand, a contractor is expected to be an expert and would therefore not require training or materials from the contracting party.

Aside from the above, another widely accepted test in determining an employee and a contractor is the ABC test. Similar to the differences highlighted above, the ABC test uses three (3) major conditions to determine if an individual is an employee or a contractor. The 3 conditions as found in the Black’s Law Dictionary are where the individual “… (A) is free from the control of the employer, (B) works away from the employer's place of business, and (C) is engaged in an established trade.”

Judicial Precedence

Although this has not been a matter for adjudication in Nigeria, there are several established cases in other jurisdictions. In a recent ruling in India in the judgement between Bharat Heavy Electricals Limited (“BHEL“) vs. Mahendra Prasad Jakhmola & Ors (Civil Appeal No. 1799-1800 of 2019), the Supreme Court of India reiterated the basic tests to be applied in determining whether contract labourers can be classified as direct employees. BHEL had entered into an agreement with a contractor to engage contract labourers in its factory in North India. The employment of certain contract labourers was then terminated by BHEL, following which the contract labourers approached the Labour Court seeking reinstatement. The Apex Court, in order to decide the dispute, relied on two of the well-recognized tests to find out whether the contract labourers were the direct employees of the principal employer: (i) whether the principal employer pays the salary instead of the contractor; and (ii) whether the principal employer controls and supervises the work of the employee”. It was determined by the Supreme Court of India that the contract labourers are not direct employees of BHEL on the basis that the contractor was responsible for paying them and that BHEL only exercised secondary control over the employees since the contractor was responsible for assigning the labourers to BHEL. In this case, the court relied on a two-prong test in determining if the labourers were in fact, direct employees and BHEL had same obligation to them, as it would to its employees.

Another interesting judgement to consider is the ruling in the case between Uber BV and some of its London drivers with whom it had signed an independent contractor agreement. On 19 December 2018, the Court of Appeal of England and Wales upheld the ruling of the Employment Tribunal in the case between Uber BV v Aslam. The Uber drivers had requested for minimum wage payment and paid leave. In arriving at its judgements, the court deliberated over a number of factors which included: (i) Uber owns a transportation business and the drivers provide skilled labour through which the organisation delivers its services and earns its profits; (ii) Uber requires drivers to accept trips and/or not to cancel trips, and enforces the requirement by logging off drivers who breach those requirements and that Uber fixes the fare and the driver cannot agree a higher sum with the passenger shows a high degree of control by Uber; (iii) Uber accepts the risk of loss which, if the drivers were genuinely in business on their own account, would fall upon them. Based on these and other considerations, the Court of Appeal upheld the ruling of the Tribunal that Uber employs its drivers, thus they are entitled to minimum wage and paid leave.

Conclusion

From an examination of these two recent rulings in different jurisdictions, it is clear that the determination of whether a worker is a contractor or employee goes beyond the wording of the contract. The presence of certain conditions might suggest an employment contract. The conditions include but are not limited to; control, supervision, payment for service rendered and responsibility for acts committed in the scope of employment.

The implication of this is far reaching in complying with the provisions of employee related regulations and statutory levies. For instance, the Employee Compensation Act (ECA) mandates all employers to pay a levy of at least 1% of their total monthly payroll into the Fund. A company that exempts from its payroll, payments to ‘contractors’ who then fail the test of independent contractors would unwittingly be in breach of the ECA.

The Pension Reform Act (PRA), 2014 also requires that an employer contributes 10% of an employee’s monthly emolument to a retirement savings account (RSA) for the employee. A company that fails to make the contribution for “contract staff” that are subsequently determined to qualify as employees would be in breach of this statutory obligation.

In conclusion, every company would be well advised to properly evaluate whether the people it currently refers to as contract staff are in fact, employees. And while there has not been a judicial determination on this in Nigeria, it is only a matter of time, especially given how similar the Nigerian judicial system is, to that of the United Kingdom.


About KPMG Nigeria

KPMG Nigeria is a professional services firm with deep expertise in the provision of Audit, Tax and Advisory services to clients in various industries and sectors of the economy including the public sector. KPMG is well represented in Nigeria and across the African continent. Our objectives are to provide quality services to multinational, regional and local clients and to enhance the product offering in certain previously under-serviced markets.

For more information, please contact:

Egheosa Onaiwu

Associate Director - Clients & Markets

KPMG in Nigeria

egheosa.onaiwu@ng.kpmg.com

Adedolapo Adebayo

Senior Finance Manager

KPMG in Nigeria

adedolapo.adebayo@ng.kpmg.com

© 2021 KPMG Professional Services, a partnership registered in Nigeria and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.


For more detail about the structure of the KPMG global organization please visit https://home.kpmg/governance.

Connect with us

 

Want to do business with KPMG?

 

loading image Request for proposal