Labour Brokers, the 3-Month Deeming Rule and the PSP Tax Trap

Use a labour broker for more than 3 months and the law deems the worker to be your employee. Section 198A of the Labour Relations Act (LRA) limits a genuine "temporary service" placement to 3 months; after that, you become the employer for labour-law purposes and the worker must be treated no less favourably than your own staff doing similar work. A second trap waits on the tax side: the personal service provider (PSP) rules can force you to withhold PAYE from a one-man company you thought was an ordinary subbie.‍‌​​‌‌​​‌​‌‌‌‌‌‌‌​‌‌‌‌​‌‌​​‌​‌‌​‌‍

What a labour broker (TES) is

A Temporary Employment Service (TES), colloquially a labour broker, is a business that places workers with client businesses. For the first phase of a placement, the TES is the employer of record: it runs payroll, and you receive the labour without the employment relationship. That arrangement is lawful, but it has a hard time limit.

The 3-month deeming rule (section 198A)

For workers earning below the BCEA earnings threshold, a TES placement only counts as a "temporary service" for a maximum of 3 months, or while substituting for an absent employee. Once the 3-month mark passes, the client is deemed to be the employer under section 198A(3)(b). The Constitutional Court confirmed in Assign Services v NUMSA that after 3 months the statutory employment relationship shifts to the client: you become the employer for LRA purposes, even though the broker may keep running the payroll.

What that means in practice:

• You carry the employer duties for that worker: discipline, dismissal fairness, and labour-law compliance all land on you.
• Equal treatment applies. The deemed employee must be treated no less favourably than a comparable direct employee doing similar work, including on pay.
• You cannot reset the clock. Terminating a placed worker on day 89 to dodge the deeming rule is an automatically unfair dismissal under section 198A(4), which carries compensation of up to 24 months' pay (see Dismissals and the CCMA).

If you genuinely need labour for longer than 3 months, the honest options are to employ the person directly or to contract with a genuinely independent business (see Employee vs independent contractor).

The PSP tax trap

A personal service provider is a company, close corporation or trust through which one person renders services to a client, but which SARS treats as effectively an employee for tax purposes. An entity is a PSP if any one of these is true:

• The person doing the work would ordinarily be regarded as your employee if they dealt with you directly.
• The work is performed mainly at your premises and the person is subject to your control or supervision over how or when they work.
• More than 80% of the entity's service income comes from you (or an associated institution).

The escape hatch: the entity is not a PSP if it employs 3 or more full-time, non-connected employees who are directly involved in delivering the service throughout the year of assessment.

The consequences of PSP classification bite the client as well as the entity. You must withhold employees' tax at source from every payment to the PSP, and the PSP loses most business deductions: it may broadly deduct only employment costs such as the salaries it pays. On the withholding rate, published sources conflict: some cite 27% for companies and close corporations, others 33%, with 45% applying to trusts. Confirm the current rate against SARS Interpretation Note 35 (Issue 5, March 2023) at www.sars.gov.za before you run a payment.

Worked example: the one-client plumbing CC

Mike runs a close corporation that provides plumbing services exclusively to one large contractor, ABC Builders. He earns R80,000 a month from ABC alone, works on ABC's sites, and ABC's foreman directs how and when he works. All three PSP triggers are met. ABC must withhold PAYE from every payment to Mike's CC, and the CC cannot deduct the usual business expenses like the bakkie and tools; only wages paid to qualifying employees. Mike's realistic choices: restructure into a genuinely independent business with multiple clients and real autonomy, or contract directly with ABC as an employee.

Common mistakes

• Rolling a "temporary" broker placement past 3 months and assuming the broker still carries the risk. After 3 months, you are the employer.
• Day-89 terminations. Automatically unfair, and the CCMA has seen the pattern before.
• Paying a one-man Pty Ltd gross without checking PSP status. If SARS reclassifies, the withholding you failed to make becomes your problem.
• Confusing the labour-law test and the tax test. Section 198A, the employee presumption and the PSP rules are three separate nets; passing one does not mean passing the others.

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