Are your staff contractors or employees? What’s the difference and why is it important?
Martelli McKegg lawyers Mathew Martin and Saleha Hamid-Drew run over the finer points of the issue
One of the most common ‘employment’ disputes that we come across involves disgruntled contractors claiming that they were, in fact, employees.
Normally arising when there is a breakdown in a workplace relationship, disputes like this can give rise to serious financial consequences for employers if a contractor successfully proves
they were an employee. Section 6 of the Employment Relations Act 2000 defines an employee as a person “employed by an employer to do any work for hire or reward under a contract of service”. But what does that mean?
Distinguishing employees from contractors
Most employment laws do not cover contractors in the same way as employees. Unlike employees, contractors pay their own tax, don’t receive annual or sick leave and can’t bring personal grievances against their employer. Contractors can obtain tax advantages and other incentives to contract for themselves, but lose out on some of the protections that employment law offers.
The difference between employees and independent contractors is not always clear, but it is important. To determine whether or not someone is an employee or a contractor, employment law sets out a number of guiding principles that parties should consider.
Real nature of the working relationship
As a rule of thumb, in deciding whether a person is an employee or an independent contractor, regard must be had to the ‘real nature of the working relationship’, not just
the label you have given it. The Employment Relations Authority (the ERA) regularly makes
decisions on these issues, which provide guidance on how to interpret these factors.
One way to think about it is like this – does the worker serve their own business, or someone else’s? If they work in service of their own business interests, then it is more likely they are a contractor. If it is someone else’s, then it is more likely they are an employee. To determine the real nature of a working relationship, the ERA will look at what the parties actually said and did during the working relationship. Other factors the ERA will consider include:
Is there a written agreement and what does it say?
Common intention as the worker’s status is relevant. This is usually indicated in the written and oral terms of the agreement between the parties (eg, an individual employment agreement versus an independent contractor agreement).
Intention alone, however, does not determine the true nature of the relationship between the parties. What is almost more relevant is how the parties actually behaved in performing the contract.
We see a trend in recent cases before the ERA and Employment Court, where the courts are more willing to make declarations that directly contradict what is in the written agreement. This includes in trades, where traditionally there have been high numbers of contractors (for
example, building and construction) but who the courts have considered to be employees. While those decisions are still usually made on a case-by-case basis, it is something that employers and contractors should be aware of.
Does the worker have a high degree of freedom over when, where and how they work?
The greater the control exercised over the worker’s workplace performance, the more likely that person is an employee. A worker with greater freedom to choose who to work for, where and when they work, the equipment used, and so on, is more likely to be a contractor.
For example, a worker who is required to wear a company uniform and drive a sign-written company car may be more likely to be an employee than a contractor. Apprentices are almost certainly more likely to be employees than contractors, given the level of control and oversight required over their work. This is not a black and white rule, but one of many factors that might point to an employee/ employer relationship.
Does the worker do more ‘one-off projects’, or are they a key part of our ongoing operations?
The work performed by an employee is usually integral to the employer’s business. A person is more likely to be an employee if the work is the type that is commonly done by employees, continuous, and for the benefit of the business rather than for the benefit of the worker. On the
other hand, the work performed by a contractor may be considered as an accessory to the business.
For example, if a worker is required to work across multiple projects during set hours per week (say Monday to Friday, 7am to 3pm), they are more likely to be an employee. A worker who only works on one project, and sets their own hours, is more likely to be a contractor.
Getting it wrong
As we said at the outset, issues normally only arise in the context of a dispute. When all is well, there appears to be no need for a close look at contractor/employee status. When things go wrong, however, then things can become more serious.
Businesses that incorrectly classify employees as contractors may be liable for:
Arrears of wages for unpaid holiday pay.
Unpaid PAYE tax.
Penalties imposed by Inland Revenue and the ERA.
We recommend that when hiring workers, businesses consider which contract is most suitable
(employment versus independent contractor) before offering work. It is not a simple case of just choosing to call someone a contractor or employee; employers need to carefully consider the true nature of the relationship, while contractors/ employees need to determine what their respective rights and obligations are depending on the relationship.
It may well be that a worker starts off as an independent contractor, but over time becomes more akin to an employee. In these circumstances, the business should discuss the changes with the worker and update the contract to reflect the true nature of the relationship.
Whatever the case, if there is a risk of potential liability, where someone may be an employee rather than a contractor, getting advice at an early stage is critical.
Mathew Martin is an associate and Saleha Hamid-Drew is a solicitor (foreign qualified) in Martelli McKegg’s litigation team, both specialising in employment law. They represent and advise both employers and employees on a range of employment issues.
Mathew's phone number is +64 9 300 7631 and email is Mathew.Martin@martellimckegg.co.nz. Saleha's phone number is +64 9 950 9033 and email Saleha.Hamid-Drew@martellimckegg.co.nz.
This article is not intended to be relied upon as legal advice