A study by the Centre for Global Development found that almost 60% of youth in Uganda are now involved in the gig economy due to job losses arising from the Covid-19 pandemic. The gig economy refers to a labour market characterized by short-term contractors or freelance work as opposed to permanent jobs.
Currently, more employers are scaling down their reliance on permanent employees and have turned to independent contractors to meet their human resourcing needs. While this may reduce the wage bill and limit employers’ obligations towards workers, it may have huge tax consequences for employers if not done right.
The line between independent contractors and employees is often blurred and employers run the risk of having their workers treated as employees for tax purposes if certain considerations are not carefully thought through.
Whether a worker is an independent contractor, or an employee depends on the relationship between the worker and the employer, specifically, the level of control exercised over the worker. If the employer controls what will be done and how it will be done, then the individual is most likely an employee.
For example, I am required to report to work by 8 a.m., use the office assigned laptop for my work, I am restricted from accessing certain websites, I am prohibited from providing similar services to other entities and I must account for my time by completing a daily timesheet. My employer would definitely struggle to convince an eight-year-old that I am an independent contractor.
It is never black or white and there are certain factors that are considered when assessing the level of control / relationship between the worker and the employer. For example, whether the employer controls or has the right to control what the worker does and how the worker does the job; whether the employer directs or controls the financial and business aspects of the worker’s job. For example, does the employer provide the worker with tools for use in their work (computers, stationery, printing facilities) or determines how the worker is paid (periodic payments regardless of the work done)?
Whether the worker enjoys employee type benefits such as leave pay, health insurance and sick leave and whether the worker can perform work for multiple businesses.
In February 2021, in a landmark legal battle involving Uber, the ride sharing app, the UK Supreme Court ruled that Uber drivers were employees and not self-employed independent contractors. To a large extent, the degree of Uber’s control over its drivers, the fact that the company sets fare prices, collects customers’ payments and charges fees, pushes drivers to accept fares when they may not want them and has the right to tell drivers to leave the platform were critical factors.
Misclassifying an employee as an independent contractor can have adverse tax consequences for the business. For example, the business can be held liable for the employment taxes of the worker as employers are generally required to withhold Pay As You Earn (PAYE) from an employee’s wages. The employer is also required to contribute towards the employee’s social security. However, independent contractors take full responsibility for their taxes and must file a tax return every quarter and make quarterly tax payments.
Crystal Kabajwara is an Associate Director with PwC Uganda’s tax practice.