One of the biggest fixed costs for a business is the human resources (HR). Depending on the number of employees, the cost is usually the largest expense due to payment of salaries and other associated costs like medical cover, pensions and statutory deductions.
The statutory costs are mandatory and include National Hospital Insurance Fund(NHIF), National Social Security Fund( NSSF) and Pay-As-You-Earn (PAYE). Medical cover and pension are optional.
Due to Covid-19 economic fallout many businesses have laid off staff while others have effected salary cuts. Some industries like tourism are adversely affected by the Covid-19 health restrictions and a majority have had to lay off staff due to low demand of their services. Some positions have simply become obsolete.
Today I will highlight a human resource option for your business that will be a win-win solution for your business and the staff. The option will involve some restructuring but it will assist your business and staff survive the turbulent times.
A business with an oversized work force can consider the strategy of restructuring from employment into independent contractors. It is cheaper to retain staff as independent contractors rather than as employees. As stakeholders of your business, employees have an interest in its sustainability and long life.
The option to convert terms to independent contractors has been used by large corporates to fuel growth. Such corporates needed to immediately cut costs while accessing services from competent staff. Such corporates then resorted to conversion of terms from employment to independent contractors. The same model can be applied in your business.
An independent contractor arrangement allows your former staff to perform the same duties only that they are not employees of your business. Depending on how the contract is drafted, an independent contractor’s term can be exclusive or non-exclusive. An exclusive means that your former staff cannot work for any other similar business. A non-exclusive arrangement means that your former staff can work for your competitors.
The benefits of getting into independent contractor arrangements are many.
First, it will shift the legal regime that governs your arrangement. The employment laws will cease to apply in the arrangement of independent contractor as your former staff has ceased to be an employee. Labour laws and the wealth of jurisprudence from the labour courts is such that the law has many provisions which are more skewed in favour of the employee.
Second, some of the remedies provided for under labour law such as the remedy of re-instatement are not available in other courts. An independent contractor is not governed under labour laws but rather under contract laws. This means in the event of a dispute labour laws will not be applicable but the dispute will be interpreted according to contract law.
Conversion of terms
Conversion of terms into independent contractor allows the business to make costs savings. As an employer in addition to salaries one is required to pay NHIF, NSSF and PAYE. For some businesses there is payment of medical and pension as benefits. When you convert terms these costs are not payable anymore therefore allowing your business to save as much as 50 per cent.
Conversion of terms into independent contractor allows the business to make savings while allowing staff to retain their jobs.
To convert terms, then you will need to terminate the existing contracts and get into arrangements governing how the dues under the terminated contracts will be paid off long term. You then enter into new independent contractor agreements.
Mputhia is the founder of C Mputhia Advocates.