This leaves a question; Should Company A acquire new staff with the knowledge that they will no longer be needed after said compliance is completed or is there another alternative?

The employment of staff comes with several implications and responsibilities:

1. Employer’s/Vicarious liability
2. Pension withholding and contributions
3. Tax withholding requirements
4. Generally inflexible contracts
5. Sensitive termination procedures and considerations
6. Trainings and team building
7. Employment benefits

These implications and responsibilities are arguably worth taking on for persons who are genuinely required and of value to your organization. They help to protect one’s employees and create an atmosphere of reciprocated value between employer and employee, which is the kind of relationship that tends to produce the best outcomes to an organization.

While the former is all well and good, some workloads are not frequently recurring. For instance, the KYC example highlighted above might come into play only a handful of times in a year. Where a person is employed specifically for that task, they will likely find themselves underutilized and unchallenged. For the organization, however, the downsides are much more acute as it will be responsible and accountable for a person that does not provide continuous value to it.

Furthermore, an independent contractor is usually the best option where an organization does not have the necessary capacity to carry out a particular venture thus outside help becomes unavoidable.

Naturally, especially through reading the title, it would be expected that an independent contractor is the answer to this concern. That an independent contractor comes with all the benefits of an employee minus all the obligations and restrictions. While this is generally true it is usually not as straightforward to set up an independent contractor arrangement in a way that will completely absolve the organization from the same responsibilities that would befall an employer.

ADVANTAGES OF ENGAGING AN INDEPENDENT CONTRACTOR

Operates on a fixed term/non-permanent basis

This is an obvious advantage to engaging an independent contractor. That, an organization will only have the said contractor only for as long as he/she is needed for the specific task or operation. There is no need to retain or keep an independent contractor where the task they were hired for no longer exists. This, in the long run, aids in costs saving. These savings may not seem apparent or obvious in the short-term but may amount to substantial sums over the years.

Reduces reallocation of existing human resources whilst boosting productivity

Hiring an independent contractor allows the existing employees of an organization to proceed with their day-to-day tasks without said tasks being placed on pause for an emergent need. Hence, the ability to carry out core day to day operations side by side with other side operations will enable an organization to maximize its efficiency without dividing its staff.

Reduces supervisory and management obligations

Organizations with several operations will benefit from outsourcing its operations to independent contractors. Effective outsourcing will greatly reduce the need to supervise every part of an operation since the contractor will aid in that aspect of production. One needs not to worry about the performance of each member of staff, supervision of all points of production, acquisition of all necessary licenses and approvals, tracking payments and so on. This is why even contractors tend to engage sub-contractors as well in order to offload the associated supervisory and management aspects.

Shifting the burden of accountability

Hiring an independent contractor over employing a person will keep the organization from being directly responsible for the wellbeing of personnel involved in the said operation. Since an independent contractor is not considered a part of the organization, their actions cannot easily be tied to the organization as long as the parameters in the contract are proper and well set out. This creates a clear benefit by shielding the organization from potential unforeseen circumstances.

ASSOCIATED CONCERNS WITH ENGAGING AN INDEPENDENT CONTRACTOR

The above stated benefits are what attract organizations to independent contractor arrangements but these concerns must be well taken into account to enable the hiring organization to reap the benefits sought after.

Tax Concerns

The Tanzania Revenue Authority (TRA) will not automatically admit an independent contractor arrangement as such if it carries features of an employment contract. This means that the organization might end up with tax obligations as if said independent contractor were an employee. This needs to be avoided through setting up an effective contract and arrangement. The reason for this is to prevent the emergence of unexpected expenses in the form of taxes and other related government charges.

For tax purposes, a contract simply stating that an arrangement is an independent contractor arrangement will not automatically move the Tanzania Revenue Authority (TRA) to consider such arrangement as a non-employment arrangement for tax purposes. For this to happen, TRA has several aspects that it considers before concluding the nature of the arrangement.

Where an organization has engaged an independent contractor for a specific task, that contractor is only to be told what results are expected of him however the means used to achieve said results are not to be placed under the control or determination of the organization since doing so will create an employment relationship in the eyes of the TRA.

Modality of payment should be set up in a way that it reflects the work done and not operate on a monthly or regular basis. This helps to distinguish independent contractors from employees as they tend to be paid through the use of invoicing and not through a fixed monthly pay-out.

The retention of an independent contractor is also an important aspect to consider. The TRA will consider an independent contractor as an employee where the hiring organization prevents the independent contractor, through the contract of engagement, from working or providing services to other persons or organizations. This is because a true independent contractor can freely provide services to different clients so long as they have the capacity to do so.

Finally, the hiring organizations should not provide employment-like benefits to an independent contractor. Benefits such as pension contributions, medical insurance, maternal leave and so on tend to be reserved for employees hence may result in the TRA to consider an independent contractor as an employee.

Liability Concerns

Engaging an independent contractor in lieu of an employee might seem like an option safe from legal and financial liability to the organization and, generally, this tends to be the case. However, there are certain scenarios where an organization might be held responsible for the actions of an independent contractor.

An example is where an organization hires an incompetent independent contractor. In this case, any problem or injury that results from the actions of the incompetent independent contractor will be the direct responsibility of the hiring organization since they had the duty to make certain that the independent contractor was competent. This places more responsibility on an organization to be highly critical and prudent when selecting an independent contractor for hire. Thus, an organization must always be certain that said independent contractor is of the necessary capacity required for a particular task. This will help to absolve the hiring organization from responsibility should the independent contractor act negligently or recklessly.

Where an organization plans to equip a hired independent contractor with tools & equipment for carrying out the operation under agreement (e.g., where an organization provides an independent contractor with cranes to facilitate building activities) the organization must ensure that said tools and equipment are in proper and reliable condition for the tasks at hand. This is a crucial aspect to consider since any problem or injury that results from the condition of said machinery & equipment will be the responsibility of the organization and not of the hired independent contractor.

Therefore, it would be more suitable for an organization to seek out independent contractors that operate with their own machinery and/or equipment.

Furthermore, where the employing organization directs or controls an independent contractor, they will be responsible for the actions of that independent contractor. The same responsibility also applies where the employing organization had provided plans to the independent contractor which wound up causing harm to a third party.

Conclusion

Using independent contractors is not a completely watertight solution to the issues associated with employment. It may carry the tax implications tied to employment or it might even result in financial and/or legal burdens against the hiring organization. For these reasons, it is extremely sensitive for organizations to structure contracts with independent contractors in a manner that clearly sets out and therefore differentiates such contracts with employment contracts. This will help to prevent the emergence of unexpected expenses in the form of taxes and other related government charges and will also protect the hiring organization from liability.

Important Notice:

 

This publication has been prepared for information purposes only, and it does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Cymbell Attorneys, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.