It’s disconcerting how many business owners neglect to spend time thinking about their vision, how they plan to achieve it and the risks they are likely to face along the way. Worse still, many also fail to invest time in thinking about the people who will take them to their ultimate destination.
The fact is that cosmetic appointments can result in catastrophic consequences, especially when a business fills key positions without any clear purpose or intention. This has often been the case in some B-BBEE appointments, commonly known as fronting or window dressing; or when an employer hires an employee as an independent contractor simply to dodge the relevant employment laws.
These practices may be extreme, but their impact can be highly damaging. That’s because one of the core principles of South African law is that the intention of the parties involved dictates the legal ramifications. Without getting too technical about this, our courts apply a number of tests to measure true intentions. It’s unlikely that the fronting approach to team selection would pass any of these tests.
Another mistake that employers make when it comes to selecting the right people boils down to reaction rather than prevention. In other words, a business will only fill a position when its need is so urgent that there is no time to give proper consideration to the appointment.
Desperate moves like this can be as damaging as our other two approaches mentioned above. What’s more, reactive decisions can also apply to selecting shareholders and other stakeholders, not just team members.
Long-term, poorly considered appointments can even result in litigation and business failure. With prevention in mind, this article focuses on some of the questions to weigh up when selecting a winning team.
Independent contractor or joint venture?
It’s not unusual for two parties that are independent from each other to join forces on a specific project. When this happens, the parties can opt to enter a joint venture agreement that clearly sets out their respective obligations. In many cases, however, a joint venture agreement constitutes a partnership which, in turn, raises the inherent risk of unlimited liability.
The alternative would be a contract/subcontractor arrangement. Here, the party that is awarded the main contract would appoint the other party as a subcontractor. In many cases, this option would address the risk of unlimited liability.
Another case where the independent contractor agreement may be the most feasible option is when suppliers are engaged. Such an agreement could be defined as a supplier agreement, a service level agreement or an independent contractor agreement. This option applies when an organisation has a specific project or specific requirement and needs periodic assistance from a suitable service provider to deliver.
It’s crucial to understand the risks associated with all these options, weigh the risks against the potential gains and purpose of the engagement – then formulate the most appropriate contractual arrangement.
Employment contracts: fixed-term or indefinite?
With the recent amendments to our labour legislation, it is even more important than ever to give proper consideration to engaging employees. That said, South African employment practices have never been defined by a golden thread of proper consideration. Unfortunately, the new amendments will not address this weakness.
One might think that employers would be motivated to select the right people for the right positions by the threat of a possible penalty from the Commission for Conciliation, Mediation and Arbitration (CCMA) totalling up to 12 months’ salary. Not so, in many cases.
Often, businesses going through growth spurts only focus on reacting to their current needs rather than planning and implementing their recruitment activities strategically. This often results in appointing the wrong person, who is simply incapable of doing the job.
Square pegs in round holes are not the only cause of disputes at work, but they are certainly a significant contributor.
So, it’s imperative that employers consider their human resource needs carefully and scrutinise the applications they receive with equal rigour. Beside the risk of incurring a CCMA penalty, failure to exercise care and attention could result in retrenchments that expose you to a whole new set of regulations and challenges. Put bluntly: getting rid of a few employees will no longer be the quick financial fix that it used to be.
In future, employers will be compelled to consider the exact causes of any financial problems they are facing. They will only be permitted to retrench people if they can show that their financial problems are directly linked to employing those people in the first place.
As far as the fixed-term versus indefinite contract argument is concerned: rather than invoking provisions related to an employee’s probation period, when their performance is closely monitored after first starting work with a new employer, there is a trend towards appointing people as independent contractors or as fixed-term employees. In many cases, employers do this solely to circumvent the process and procedure laid down for dismissal in our employment laws.
For this reason, the CCMA now follows guidelines to determine the true intention of the contracting parties. If the authorities find that an employer is evading an employment law provision by circumventing it, it may be deemed that they engaged an employee on a permanent contract of employment with an indefinite term.
This is yet another compelling reason to have a clear understanding of purpose and strategy when appointing a new employee. It is equally important to put the relevant human resources paperwork in place.
This should cover policies relating to the use of facilities such as email, internet and phone; remuneration and leave; sexual harassment; grievance procedures; and disciplinary procedures. In addition, job descriptions must be properly defined and employment contracts should be drawn up in line with the latest provisions.
These documents are fundamentally important when it comes to setting boundaries and guidelines for how your employees should behave in the workplace. And the way your employees behave is vital to achieving your long-term strategic vision.
What about shareholders and other stakeholders?
Electing the right stakeholders and shareholders is just as vital to minimising business risks as appointing the right team members. Here, it is important to observe the Companies Act 71 of 2008, among other laws, as well as the current B-BBEE legislation, which is especially relevant if you are bidding for large contracts, corporate or government. In both cases, you need to build your B-BBEE scores.
Defining a B-BBEE strategy that makes business and moral sense is a unique process that your business should only undertake with utmost care and attention. There is no such thing as an off-the-shelf B-BBEE strategy and you should never seek to implement one.
Shareholder agreements have always been very important tools in negotiating stakeholder involvement or attracting additional investment. Usually, these agreements also included provisions regulating governance, which is of particular significance when investing in any company.
With the emphasis on maximum transparency and proper governance structures, the law has not changed, which means your shareholder agreements must align with the new Act.
Further, in terms of the provisions relating to shareholder agreements under section 15(7) of the Companies Act, shareholders may still enter into any agreement with one another provided it is consistent with the provisions of the Act and the Memorandum of Incorporation (MOI). Your MOI is defined as a document that:
“sets out rights, duties and responsibilities of shareholders, directors and others within and in relation to a company, and other matters as contemplated in section 15; and by which:
i) the company was incorporated in terms of this Act, as contemplated in section 13; or
ii) a pre-existing company was structured and governed before the later of:
aa) the effective date; or
bb) the date it was converted to a company in terms of Schedule 2.”
Therefore, in the case of a conflict between the agreement and the MOI, the MOI will now prevail. If a clause in the agreement conflicts with the stipulations of the MOI, then only that clause will be voidable and it can only be voided by a court application.
Each document introduced by the new Act has its own specific purpose that must be acknowledged and applied in the best interests of the company. Ideally, these documents should be living documents rather than dead paperwork that ends up in someone’s desk drawer, never understood nor implemented.
Accordingly, shareholder agreements that incorporate your B-BBEE strategy on ownership and your MOI’s content on governance and voting must reflect what management is actually doing to implement your long-term vision.
Your team members are not only those people on the frontline or shop-floor of your business. They also include your managers as well as your stakeholders and shareholders. The support service providers you engage are equally import to your team’s success.
To achieve your long-term vision, you need to regulate the relationships between all these parties judiciously using the most practical, feasible and business-friendly legal solutions. We strongly advise you to work with us to develop and implement the most appropriate approach for your business.