Employment Archives

Independent Non-Executive Directors: A Value-Add for Your SME?

14/02/2021 14/05/2021

Most, if not all, entrepreneurs are passionate about their ideas or concepts for a new product or service offering. Frankly, they need to be.

Once the business is up and running it is easy, and quite natural, to be so focused on your idea and business and the busyness of the operations and activities, that emerging risks or opportunities may not be seen or anticipated – ‘not seeing the wood for the trees’. Having an advisor or advisors may, of course, help. However, an independent non-executive director has, by virtue of their responsibilities on the board, a stake in the survival and growth of the business. Furthermore, as they are not involved in the day-to-day operations, they can bring valuable perspectives to the table.

Many small and medium-sized enterprises (SMEs) are owned and managed by the founder(s), sometimes with the involvement of family members, and in the early stages of the life of a small or medium-sized company there would seem to be little reason or motivation to appoint independent non-executive directors to the board. However, as an entity grows in size, complexity and, hopefully, market share, there may well be a need for, and advantage in, having diversity and independence of thought in the direction of the company.

All members of the board, whether executive, non-executive or independent non-executive have a legal duty to act with independence of mind in the best interests of the organisation.

Firstly, what exactly is an “independent non-executive director”?

The Companies Act and King IV define a director as “a member of the board of a company, as contemplated in section 66”. There is no definition in the Act of ‘Independent’ or ‘non-executive’. Accordingly, all directors have the same responsibilities.

King IV, however, explains independence as follows: “When used as the measure by which to judge the appearance of independence, or to categorise a non-executive member of the governing body or its committees as independent, it means the absence of an interest, position, association or relationship which, when judged from the perspective of a reasonable and informed third party, is likely to influence unduly or cause bias in decision-making”.

Why appoint independent non-executives?

Appointing independent non-executive directors does not, in itself, ensure the entity’s governance is enhanced.

However, establishing a well-balanced governing body is a meaningful step towards good governance. The King IV code states: “The governing body should comprise the appropriate balance of knowledge, skills, experience, diversity and independence for it to discharge its governance role and responsibilities objectively and effectively”.
Bringing in additional skills, experience and thought to the leadership of the entity has the potential of enhancing the ability of the board, recognising and dealing with risks and opportunities, and even lifting quality and effectiveness of the deliberations in the board.
Non-executive or independent non-executive directors are charged with maintaining an arms-length relationship with management, exhibiting professional scepticism and bringing independent judgment to bear on issues of strategy, risk management, performance and resources including key appointments and standards of conduct. Non-executive directors may not have any operational capacity within the entity; no employment relationship; not be a major supplier or major customer and should not be rewarded on the basis of the entity’s performance.

An entity recognised for its strong ethical and effective governance will likely attract more business as a trusted partner. After all, while a company requires a licence from CIPC (Companies Intellectual Property Commission) to commence business, it also needs a Social License to Operate!

What should the independent non-executive director bring to an SME?

Someone, as mentioned above, who will bring specific skills and a range of business experience of relevance to the entity. While it may be helpful to have experience in the entity’s particular industry, diversity of experience in other sectors such as, for example, the financial sector, could add value.

Clearly, an understanding of the business and the industry is essential in order to make a positive contribution. A non-executive director is expected to make a creative contribution to the board by providing objective and constructive challenge and advice.
Owners and management of an SME should not seek to appoint independent non-executives who will simply reflect management’s views, but accept that honest, respectful and robust challenge should be expected and encouraged.

What qualities should you seek in an independent non-executive director?

Clearly, an independent non-executive director should exhibit appropriate behaviour, have a strong ethical stance with absolute integrity; a disciplined and dedicated approach to the role together with a good understanding of the requirements of good governance, controls and risk and opportunity management.

A knowledge and understanding of the regulatory environment of the entity together with the key players and risks in the supply chain and customer base (the entity’s market) is an added advantage.

What should you offer a new appointee to your board?

Any new independent non-executive should insist on an induction programme together with appropriate Directors’ and Officers’ indemnity cover.

Realistically, most SMEs may not be able to offer competitive fees, compared to large or listed companies. Both the Institute of Directors in South Africa and PricewaterhouseCoopers issue useful annual guides to directors’ fees. SMEs should consider making use of this resource in determining the level of fees they are able to afford.

Furthermore they need to consider how the fees are determined i.e. per meeting attended; a retainer regardless of meeting attendance or a combination of both – retainer plus per meeting attended. The SME should also undertake annual director’s performance evaluation.

A non-executive and independent non-executive director needs to balance the contribution they can make in considering an appointment where the fees are, perhaps, not quite at the level they expect. Serving on NPO (Non-Profit Organisation) and SME boards is an opportunity to ‘put back’ their experience and skills. They should consider the responsibility and risks they undertake against the potential contribution they can make to these essential sectors of the economy.

Sales Reps Are the Lifeblood of Your Business – 10 Interview Questions To Ask

14/02/2021 14/05/2021

In any business there are few more important people than the sales reps. In this pandemic climate, they have become even more important for keeping small businesses and start-ups afloat and pushing bottom lines into the black. They are the people at the coal face of meeting with clients and selling your products, and are not only the ones who will make or break your bottom line, but also the eyes, ears and face of your company. Placing the perfect candidate in this role is therefore an essential element for building a successful company. We look at ten important questions you should be asking every sales rep candidate you interview.

“Sales are contingent upon the attitude of the salesman – not the attitude of the prospect” (W. Clement Stone)

With the world experiencing its toughest business environment in decades, your sales reps are the people who more than anyone else need to not only embody the company and its values, but also be capable of delivering on their job specifications every time they step in front of a client. They are the employees that people will first judge your company on, and often it’s the impression they make that will build or break your business.

As well as being able to convert sales, these critical employees also need to gather feedback, accurately communicate your client messages and analyse the market to ensure your products are best placed. This is a critical series of skills that require a very particular person. Unfortunately the world is full of extremely charismatic people, who on the surface may appear to be exactly what you need and who, in the long run, will only end up damaging your brand and costing you sales.

So how do you find the person with the right temperament, the right abilities and the right mindset? These are the ten questions you should be asking every sales rep candidate you interview.

Walk me through a successful sales process. What is your role?

On the surface this is a simple question. Everyone can guess that a sales employee’s role is to sell things, but do they know they are also supposed to gather information, build relationships and represent the company values and ideals? If not, they either do not have experience or simply do not understand what they have applied for.

Why are you interested in this role as a salesperson?

The right sales candidate will speak about the challenge of sales, the people-centric aspects of the job, the relative independence or the competitive aspect. A poor candidate will either start speaking about the high salary, or quickly give away the fact that they don’t know much about what they have applied for.

Tell me in detail about a sale you made where you think your sales pitch was perfect.

With a sales rep you are looking for five qualities and this question will test them all. Confidence, diligence, honesty, thoughtfulness, and a positive attitude are all an important part of being a sales rep and how they handle their “perfect sale” will quickly illustrate all of these things. Did they connive to get the sale? Did they go above and beyond for a client? And do they tell this story in a way that you buy it as a perfect sale?

Tell me about a time you had to deal with a complaint from a customer. What happened, and how did you resolve it?

Both the first and second parts of this question are equally important. How the candidate describes what happened can indicate the kind of person they are. Do they blame others for the problem? If they take no ownership of the problem and instead point to accounts, another rep, the client or even their boss making a mistake without adding in their own culpability then they may not have the emotional maturity to truly handle conflicts.

How they resolved it will show you the kind of person they are under pressure. Did they still make the sale? Did they build the relationship with the client? Did they manage to come to a solution that still helped the company they work for or did they simply cave and give the client everything they wanted?

Tell me about a time you missed a sale or a big opportunity. What was it and what happened?

Similar to the previous question this one speaks to emotional maturity and the ability to learn from mistakes. A candidate who cannot explain why they lost the opportunity and what they could have done differently hasn’t spent time thinking about that problem and will likely not do so when faced with the problem again. These candidates will never be among your top sellers as the ability to learn and evolve is of utmost importance in sales.

How do you stay motivated?

Sales can be a frustrating and sometimes thankless job and self-motivation is therefore an important skill. What you are looking for here is any believable method that does not involve the mention of salary or bonuses. Being interested in a bonus is not a problem by itself, but being able to pick yourself up and do the kind of job that makes a top sales rep cannot be linked only to salary.

Why would you choose our brand over others?

Coming into an interview is just like entering a client’s office as a sales rep. You are selling yourself and need to be prepared. This question will quickly reveal the level of effort a candidate is prepared to go to, to get the job. It will also give you an idea of just how hard working they are, and how much effort they will put in when learning about your company, your products and your goals.

How long are you willing to fail at this job before you succeed?

This is a tough question that forces the candidate to think out of the box and improvise an answer they couldn’t have prepared for. Beyond determining how they would handle setbacks, this question will give you an insight into their expectations, and ability to plan for and handle failure. Do they hope to engage in training, will they seek out answers or are they prepared to sit back and learn on the job as problems arise? There is no right answer but it will definitely help the interviewer determine culture fit and potential.

What’s the most interesting thing about you that’s not on your CV?

A sales rep needs to be a people person. Small talk and the ability to connect on unexpected questions is an important skill. How they improvise here is how they will improvise when asked a tough question by a potential client. What’s important here is how the person answers and not just what they say. Are they able to speak personally? Tell a good story? And be convincing? Perhaps their hobby or story wouldn’t normally be interesting to you, but did they sell it as an interesting thing? Did they intrigue you? If the answer is yes, then you have found an important clue to how they will be out on the streets representing your brand.

Can you remember a time when a problem arose and you weren’t able to contact your manager? How did you handle this situation and who did you turn to for help?

This question speaks to the candidate’s initiative and potential for leadership. Are they capable of thinking on their feet? Did they make a sound judgement that day? Being able to act alone without asking questions of seniors and doing the right thing would show they have both of these valuable traits.

A Remote Working Danger: Independent Contractor or Employee?

19/12/2020 14/05/2021

The move to a much greater level of remote working this year has reinforced the need for small businesses to ensure that they classify the people that work for them correctly. One of the biggest challenges for small businesses is to ensure that independent contractors, especially sole proprietors, do not drift into a position where the South African Revenue Service or the Department of Labour would classify such a person as an employee. The failure by a small company to manage the relationships with their independent contractors can lead to great costs for the company if the authorities find that the relationship with any of them is an employment relationship and the firm then needs to rectify the situation.

The prevalence of remote working since the start of the national lockdown in March has brought to the fore the need to distinguish between an employee and an independent contractor.

This topic has both labour and tax law implications.

Anli Bezuidenhout, a Cliffe Dekker Hofmeyr employment lawyer, said during an interview that a situation could arise where an independent contractor started working for a company, but ended up operating as an employee.

“It is important that both parties manage the relationship because the lines get blurred. Companies need to classify people correctly and manage the relationship properly,” she said.

Tertius Troost, a Mazars tax manager, said during an interview that small businesses could avoid an administrative burden if they dealt with an employee as an independent contractor.

“Small businesses battle with Pay-As-You-Earn (PAYE) tax, especially with complicated employee fringe benefits,” Troost added.

Having an employee defined as an independent contractor means that the employer would not need to pay the person either annual or sick leave or overtime pay, nor would the employer be required to make pension or medical aid scheme contributions.

In addition, an independent contractor cannot enforce a claim against the company for unfair dismissal, nor hold the employer to any of the many other employee rights provided by our labour laws.

The company would also not need to contribute on behalf of the contractor to the Skills Development Levy, Compensation Fund, and the Unemployment Insurance Fund.

Bezuidenhout said some companies like to have employees classified as independent contractors, because they then do not have to comply with the Labour Relations Act (LRA) and the Basic Conditions of Employment Act (BCEA).

Often employees agree (or pro-actively request) to be independent contractors in order to avoid PAYE and to make expense deductions against their business income.

Bezuidenhout said that individuals were often happy when companies classified them as independent contractors because that gave them flexibility.

However, the South African Revenue Service (SARS) and the Department of Labour look at the actual relationship between a company and those that work for it – it is a factual enquiry and an employer that incorrectly classified an employee as an independent contractor would be liable for the employee’s tax that the company should have deducted plus penalties and interest.

However, the employer could (at least in theory) recover the tax paid to SARS from the employee.

How tax law defines an employee versus an independent contractor

SARS requires a company to withhold employees’ tax when three elements are present, namely an employer, the payment of remuneration and an employee.

SARS also provides two tests to determine whether a person is to be regarded as an independent contractor for employees’ tax purposes.

If an employee meets both parts of the first test, then the person is an employee and any earnings paid to that employee will be subject to employees’ tax.

The first part of this test is that the employee performs over 50% of the services or duties at the client’s premises.

The second part of the test is whether any person controls the employee or his or her work hours.

The second test determines whether a contractor is trading independently.

Where an independent contractor rendered services to more than one client, then the contractor needed to apply these tests in respect of each client to assess whether the contractor was an employee at each engagement.

Another test is the common law “dominant impression test” that SARS applies to determine whether an employee is an independent contractor or an employee.

How to apply the common law “dominant impression” test

The “common law dominant impression grid” sets out 20 of the more common indicators.

These indicators take a detailed look at the relationship to determine if it is an employer and employee relationship or a client and independent contractor relationship.

There are three categories of these indicators, namely:

Near-conclusive, which relate most directly to the acquisition of productive capacity;
Persuasive, which relate to the control of the work environment;
And resonant of either an employer-employee relationship or an independent contractor or client relationship, whichever is relevant.

SARS said in an Interpretation Note that it would use the dominant impression to classify the relationship as either an employee or an independent contractor relationship.

Personal service providers, labour brokers, and expatriate employees

SARS introduced anti-avoidance measures about personal service providers or labour brokers to clamp down on those trying to avoid employees’ tax.

SARS uses common law tests to determine whether a personal service provider or labour broker is carrying on an independent business.

Mazars’ Troost said that tax law required that when a company engaged a personal service provider or a labour broker, without a SARS certificate of exemption, that company had to withhold PAYE as SARS deemed such a person an employee.

SARS would only issue an exemption certificate if the labour broker or personal service provider conducted an independent business, according to a SARS Interpretation Note.

A personal services company has to have at least three employees who were not family members in order to be considered an independent contractor, Troost added.

Expatriate employees working in South Africa may need to pay employees’ tax on local income, subject to any double tax agreements which may be in place between South Africa and the expatriate employee’s home country.

In terms of the definition of remuneration in the Fourth Schedule of the Income Tax Act, a person who is not a resident cannot qualify as an independent contractor.

A quick comparison of employee versus independent contractor

Indicative factors in determining where a person is an employee or an independent contractor, according to the South African Guild of Editors.

Employee	Independent Contractor
Works for only one employer at a time.	Provides services to more than one person or company at a time.
Works the hours set by the employer.	Sets his or her own hours.
Usually works at the employer’s place of business and uses their equipment.	Works out of his or her own office or home and uses his or her equipment.
Entitled to annual and sick leave.	Not entitled to any leave.
Often receives employment benefits, such as medical aid or bonuses.	Does not receive employment benefits from the employer.
Works under the control and direction of the employer.	Works relatively independently.
Receives a nett salary after the employer has deducted income tax and UIF.	A provisional taxpayer and responsible for paying his or her own taxes.

(Adapted from: S A Guild of Editors)

How labour law handles the distinction between employees and independent contractors

The major pieces of employment legislation, the LRA, the BCEA and the Employment Equity Act (EEA), apply to employees and not independent contractors.

The law defines an employee to mean any person, excluding an independent contractor, who works for another person or the government, receives remuneration, and conducts the business of the employer.

There is no statutory definition of the term “independent contractor”.

As a result, several tests have evolved through case law, the presumption of employment provision in the LRA and BCEA, and the Code of Good Practice on “Who is an Employee”.

To ensure that employees do not lose their labour law protections, section 200A of the LRA and section 83A of the BCEA introduced a rebuttable presumption that everyone earning under the earnings threshold of R205,433.30 a year is an employee until proven otherwise and regardless of the contract concluded, according to an article on the EE Publishers website.

An employer who disputes that an independent contractor is an employee must provide evidence about the working relationship.

Employees Working Abroad: How to Avoid Double Tax

19/12/2020 14/05/2021

Due to travel bans and restrictions imposed as a result of the COVID-19 pandemic, many employees working on foreign assignments or abroad may not qualify for the foreign remuneration exemption for the 1 March 2020 to 28 February 2021 assessment period, and face paying double tax on the same income – in South Africa and in the foreign country.

In this article, we look at the requirements for qualifying for the foreign remuneration exemption, the latest legislative and circumstantial changes that need to be considered, as well as the steps that employers can take to assist their employees to plan for their foreign remuneration tax liability and to avoid a potentially crippling double tax burden.

“Every advantage has its tax.” (Ralph Waldo Emerson)

The purpose of the foreign remuneration exemption, which was introduced in 2000, is to provide relief from any possible double tax that may arise where both South Africa and the foreign country taxes the same income derived from employment, according to a SAICA article on the topic, written by Piet Nel (Project Director: Tax Professional Development).

Requirements to qualify for the exemption

The employee must be a resident of South Africa, for tax purposes.

The employee must have been physically absent from South Africa and worked outside South Africa for a period or periods exceeding 183 full days in aggregate during any period of 12 months.

The employee must have been physically absent from South Africa and worked outside South Africa for a continuous period exceeding 60 full days during that period of 12 months.

However, due to recent legislative changes and COVID-19 travel restrictions, many employees who work on foreign assignments or abroad may not qualify for the exemption for the 1 March 2020 to 28 February 2021 assessment period, and face paying double tax.

Important changes to the exemption

A new R1.25 million threshold applies for this 1 March 2020 – 28 February 2021 tax period, where previously, there was a full exemption for qualifying foreign sourced remuneration. The individual will, unless the foreign country doesn’t impose a tax on remuneration, be liable for a double tax to the extent that the remuneration exceeds R1.25 million, explains Nel.

Furthermore, since March 2020, employers must withhold employees’ tax if the taxpayer is employed by a South African resident employer, registered as such with SARS. If not, the first provisional tax was payable on 31 August 2020 and the second payment is due on 26 February 2021.
COVID-19 travel restrictions around the world prevented many employees from traveling to work outside South Africa to meet the 183-day requirement, and therefore they cannot qualify for the exemption. Although some international travel became possible after 31 May, many workers remain unable to travel internationally. SARS and National Treasury recently proposed some relief through reducing the required number of days abroad by the 66 days of COVID-19 alert levels 5 and 4 (27 March 2020 – 31 May 2020) in South Africa. This would reduce the required number of days abroad from 183 to 117 in any 12-month period, for years of assessment ending from 29 February 2020 to 28 February 2021. The current requirement of 60 continuous days abroad would remain unchanged.

How companies can assist their employees

Given that the proposed revised rules have been announced so late and that COVID-19 remains a threat to international travel – affecting employees’ ability to accumulate even the proposed reduced number of days working abroad (117) – companies need to assist their employees to plan for their foreign remuneration tax liability.

Keep updated with ongoing changes

The proposed amendment of the required number of days abroad is only expected to be finalised and approved later this year. In the meantime, South Africa has announced that all international travel can resume subject to stringent health protocols.

While this is great news, it comes at a time when a second wave of COVID-19 has sent much of Europe back into lockdown, and when South Africa is witnessing a resurgence in the number of COVID-19 cases in certain areas, which has prompted government to announce the implementation of a resurgence plan. Widespread concerns remain regarding a future return to a harder lockdown alert level, which may see travel restrictions being implemented again.

Consider the individual impact

Nel explains that the stipulated period of 12 months is not a year of assessment, but any period of 12 months starting or ending during the year of assessment. It is also not a requirement of the relevant section of the Income Tax Act that the 12-month cycles run consecutively.

As a result, whether an employee qualifies for the exemption will depend on when their specific 12-month cycle starts, as well as how much time was spent outside South Africa before and after the lockdown. There may also be double tax agreements in place with specific countries that could affect an employee’s tax position.

Cross-border employees, unable to work during the lockdown, should prudently consider when their new 12-month cycle should start. Those who continued earning remuneration from foreign employers while working remotely from South Africa will see their full income taxed in South Africa.

It is possible to get credit for foreign tax to provide relief where a double tax arises. The Income Tax Act allows for foreign tax credits to be granted where the same amount was subject to tax, or partially so, in South Africa and in another country, but only on assessment, says Nel.

In some instances, obtaining a tax directive may also be necessary. The law relevant to employees’ tax (PAYE) doesn’t allow for the foreign remuneration exemption to be taken into account by the employer on a monthly basis. SARS indicated that an employer “may at his or her discretion, under paragraph 10 of the Fourth Schedule, apply for a directive from SARS to vary the basis on which employees’ tax is withheld monthly in the Republic” and that the “potential foreign tax credit is taken into account to determine the employees’ tax that has to be withheld for payroll purposes.”

As Nel points out, there are also other practical implications to consider. Some benefits, which may be exempt from tax in the foreign jurisdiction, may not qualify for an exemption in South Africa. Examples of such benefits include free accommodation provided by the employer, security and travel services. It is also not clear how allowances, such as travel allowances, should be treated. Whilst SARS updated its practice generally prevailing in this respect, these issues are not clarified.

Professional tax assistance

In light of the ongoing changes in legislation and circumstances, and the need to consider each employee individually while taking into account the myriad factors that apply to the foreign earnings exemption, South African employers are well advised to obtain professional assistance in order to prudently assess their – and their employees’ – current tax positions and how the recent changes in respect of the foreign remuneration exemption will affect their tax liability.