Nick Chisnall, a solicitor with the Wellington and Lower Hutt Lawlink firm of Gibson Sheat, outlines what difference the Employment Relations Act 2000 may make to your business if you use independent contractors.
The primary objective of the Employment Relations Act 2000 (the "ERA") is to build productive employment relationships. It promotes mutual trust and confidence in the employment environment. The "employment environment" encompasses all participants, not just employers and employees.
ERA Only Applies To Employees
While the ERA promotes productive employment relationships, its protections apply only to employees. Independent contractors cannot use its personal grievance procedures. The ERA is no different to its predecessor, the Employment Contracts Act 1991 (the "ECA"), in this respect.
Differences Between Employees And Contractors
The parties to an employment relationship are usually not concerned with how their relationship is described when they enter it. It is only when things go wrong that it becomes important. Sometimes it can be difficult to decide whether a person is (or was) an employee or a contractor. This is partly due to the fact that anything that can be done by an employee can also be done by a contractor. It is usually up to the parties to decide how their relationship is to operate.
Does The ERA Change The Nature Of Employees And Independent Contractors?
The short answer is "no". The definition of "employee" in the ERA is the same as that in the ECA. An employee is employed for hire or reward under a contract of service. In contrast, a contractor is said to be hired under a contract for services.
However, there has been one change. When asked to decide whether a person is an employee or a contractor, the Employment Relations Authority must determine the real nature of the relationship between the parties. In doing this, it must consider all relevant matters, including the parties' intentions. In other words, it has to look further than any statement describing the parties' relationship, which includes, arguably, a written contract.
The Authority has already used this direction to decide that workers thought of as contractors by their employers were actually employees.
Does This Mean That Many Contractors Are Really Employees?
The Court of Appeal considered the issue in Cunningham v TNT Express Worldwide (NZ) Ltd [1993] 1 ERNZ 695. Mr Cunningham was a courier driver. He wanted to bring a personal grievance for unjustified dismissal, but could only do so if the Court decided that he was an employee, not an independent contractor. He had a comprehensive written contract with TNT. The contract described him as an independent contractor. He was expected to provide and maintain his own vehicle. The vehicle was to be painted in TNT's colours and he was to wear TNT's uniform. It was his responsibility to keep his licence up to date. He was to make deliveries according to TNT's instructions and was tied exclusively to service with TNT; he was not able to operate another transport service in his spare time.
The Court said that if there is any ambiguity in the contract, the proper approach is to define the person as an employee, so that he or she would be within the scope of the employment protection law. Unfortunately for Mr Cunningham, the Court did not consider there to be any ambiguity in his case. It found that he was a contractor.
The Court held that the nature of the contract turns on the rights and obligations it contains. The label used by the parties to describe their relationship is of little or no importance. This statement is similar to the direction to the Authority in the ERA.
The Court acknowledged that the employment relationship is a living thing and may change. In other words, the parties might have originally intended the worker to be a contractor, but the relationship might have subsequently altered to one of employer and employee. Mr Cunningham was unable to show such a change had taken place.
The Court said that if there is no compelling evidence of whether the worker is an employee or a contractor, then the employer has to disprove that the worker is an employee. The Court must consider these questions:
how much control does the employer have over the worker's actions?
has the worker provided his or her own equipment?
has the worker hired extra helpers?
what financial risk does the worker take and does he or she have any management or investment responsibility?
how far can the worker profit from sound management in performing his or her tasks?
What If the Contract Is Not In Writing?
The ERA requires all employment agreements to be in writing. However, the issue may continue to arise for contracts entered into before the ERA came into force in October 2000.
The Employment Court decision of Muollo v Rotaru [1995] 2 ERNZ 414 shows the difficulties facing the Court if there is no written contract. The case involved a deckhand on a fishing boat, who was paid a percentage of the proceeds of selling the fish the crew caught.
The Court had to decide what the parties intended. It said that a written contract provides a reliable guide to their intentions. If no written contract exists, then the Court has to look at the behaviour of the parties when they entered the employment relationship. Their subsequent behaviour could be looked at if their intention when they entered the contract was unclear. The Court also looked at the fishing industry to determine normal commercial practice between crew and boat owners.
The Court put great reliance on the fact that the norm in the industry was for boat skippers and crew to enter co-operative ventures, rather than employer-employee relationships. Financial success or failure relied on the size of the catch and the costs of making that catch.
The Court decided that the deckhand was a contractor and not an employee.
Make Sure The Contact Is In Writing
The Employment Relations Authority (the "Authority"), in the case of Hook v J.Bs Contractors Limited, J Wilson, Employment Relations Authority AA21/01, 22 March 2001, found that a man who appeared to be a subcontractor was really an employee. The parties had a written contract, but its description of the relationship was ambiguous. Because the worker was found to be an employee, he was entitled to raise a personal grievance for unjustified dismissal.
The Authority said that there was no doubt that the employer intended the worker to be a contractor. Additionally, it is a normal practice in the building industry for "labour only" contractors to be used. Therefore, the worker was initially a contractor.
However, the fact that the worker was given little room for initiative, being told what work to do and when to do it, was persuasive evidence to the Authority that he was really an employee. He was an integral part of the company's business: he provided few of his own tools, he could not hire other workers and, unlike the deckhand in Muollo, he always received the same wage, regardless of what the company earned. Therefore, the real nature of the relationship was that of employer and employee.
Conclusion
In itself the ERA has not given contractors more protection. It has codified the Court's ruling that the label used by the parties to describe their relationship does not determine the true nature of the relationship. Otherwise, the definition of "employee" remains the same as that in the ECA.
While the law itself might not have changed to any significant extent with the ERA, the atmosphere of employment relations has. While these are early days for the ERA, the Authority seems inclined to extend protection for employees beyond that offered under the old act.
The name of the game is certainty. This requires prospective employers to put the contract in writing. The ERA already requires employment agreements to be in writing. But the risk-averse company should ensure that all its workers are on contracts, that both define the relationship and lay out the rights and obligations of the parties. It should then ensure that the contract continues to reflect the reality of that relationship.
Every effort has been made to ensure that this information is accurate. However, it is general introductory information only. It does not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.
Web site: Gibson Sheat Lawyers
Email: nick.chisnall@gibsonsheat.com
November 2001
The primary objective of the Employment Relations Act 2000 (the "ERA") is to build productive employment relationships. It promotes mutual trust and confidence in the employment environment. The "employment environment" encompasses all participants, not just employers and employees.
ERA Only Applies To Employees
While the ERA promotes productive employment relationships, its protections apply only to employees. Independent contractors cannot use its personal grievance procedures. The ERA is no different to its predecessor, the Employment Contracts Act 1991 (the "ECA"), in this respect.
Differences Between Employees And Contractors
The parties to an employment relationship are usually not concerned with how their relationship is described when they enter it. It is only when things go wrong that it becomes important. Sometimes it can be difficult to decide whether a person is (or was) an employee or a contractor. This is partly due to the fact that anything that can be done by an employee can also be done by a contractor. It is usually up to the parties to decide how their relationship is to operate.
Does The ERA Change The Nature Of Employees And Independent Contractors?
The short answer is "no". The definition of "employee" in the ERA is the same as that in the ECA. An employee is employed for hire or reward under a contract of service. In contrast, a contractor is said to be hired under a contract for services.
However, there has been one change. When asked to decide whether a person is an employee or a contractor, the Employment Relations Authority must determine the real nature of the relationship between the parties. In doing this, it must consider all relevant matters, including the parties' intentions. In other words, it has to look further than any statement describing the parties' relationship, which includes, arguably, a written contract.
The Authority has already used this direction to decide that workers thought of as contractors by their employers were actually employees.
Does This Mean That Many Contractors Are Really Employees?
The Court of Appeal considered the issue in Cunningham v TNT Express Worldwide (NZ) Ltd [1993] 1 ERNZ 695. Mr Cunningham was a courier driver. He wanted to bring a personal grievance for unjustified dismissal, but could only do so if the Court decided that he was an employee, not an independent contractor. He had a comprehensive written contract with TNT. The contract described him as an independent contractor. He was expected to provide and maintain his own vehicle. The vehicle was to be painted in TNT's colours and he was to wear TNT's uniform. It was his responsibility to keep his licence up to date. He was to make deliveries according to TNT's instructions and was tied exclusively to service with TNT; he was not able to operate another transport service in his spare time.
The Court said that if there is any ambiguity in the contract, the proper approach is to define the person as an employee, so that he or she would be within the scope of the employment protection law. Unfortunately for Mr Cunningham, the Court did not consider there to be any ambiguity in his case. It found that he was a contractor.
The Court held that the nature of the contract turns on the rights and obligations it contains. The label used by the parties to describe their relationship is of little or no importance. This statement is similar to the direction to the Authority in the ERA.
The Court acknowledged that the employment relationship is a living thing and may change. In other words, the parties might have originally intended the worker to be a contractor, but the relationship might have subsequently altered to one of employer and employee. Mr Cunningham was unable to show such a change had taken place.
The Court said that if there is no compelling evidence of whether the worker is an employee or a contractor, then the employer has to disprove that the worker is an employee. The Court must consider these questions:
What If the Contract Is Not In Writing?
The ERA requires all employment agreements to be in writing. However, the issue may continue to arise for contracts entered into before the ERA came into force in October 2000.
The Employment Court decision of Muollo v Rotaru [1995] 2 ERNZ 414 shows the difficulties facing the Court if there is no written contract. The case involved a deckhand on a fishing boat, who was paid a percentage of the proceeds of selling the fish the crew caught.
The Court had to decide what the parties intended. It said that a written contract provides a reliable guide to their intentions. If no written contract exists, then the Court has to look at the behaviour of the parties when they entered the employment relationship. Their subsequent behaviour could be looked at if their intention when they entered the contract was unclear. The Court also looked at the fishing industry to determine normal commercial practice between crew and boat owners.
The Court put great reliance on the fact that the norm in the industry was for boat skippers and crew to enter co-operative ventures, rather than employer-employee relationships. Financial success or failure relied on the size of the catch and the costs of making that catch.
The Court decided that the deckhand was a contractor and not an employee.
Make Sure The Contact Is In Writing
The Employment Relations Authority (the "Authority"), in the case of Hook v J.Bs Contractors Limited, J Wilson, Employment Relations Authority AA21/01, 22 March 2001, found that a man who appeared to be a subcontractor was really an employee. The parties had a written contract, but its description of the relationship was ambiguous. Because the worker was found to be an employee, he was entitled to raise a personal grievance for unjustified dismissal.
The Authority said that there was no doubt that the employer intended the worker to be a contractor. Additionally, it is a normal practice in the building industry for "labour only" contractors to be used. Therefore, the worker was initially a contractor.
However, the fact that the worker was given little room for initiative, being told what work to do and when to do it, was persuasive evidence to the Authority that he was really an employee. He was an integral part of the company's business: he provided few of his own tools, he could not hire other workers and, unlike the deckhand in Muollo, he always received the same wage, regardless of what the company earned. Therefore, the real nature of the relationship was that of employer and employee.
Conclusion
In itself the ERA has not given contractors more protection. It has codified the Court's ruling that the label used by the parties to describe their relationship does not determine the true nature of the relationship. Otherwise, the definition of "employee" remains the same as that in the ECA.
While the law itself might not have changed to any significant extent with the ERA, the atmosphere of employment relations has. While these are early days for the ERA, the Authority seems inclined to extend protection for employees beyond that offered under the old act.
The name of the game is certainty. This requires prospective employers to put the contract in writing. The ERA already requires employment agreements to be in writing. But the risk-averse company should ensure that all its workers are on contracts, that both define the relationship and lay out the rights and obligations of the parties. It should then ensure that the contract continues to reflect the reality of that relationship.
Every effort has been made to ensure that this information is accurate. However, it is general introductory information only. It does not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.
Web site: Gibson Sheat Lawyers
Email: nick.chisnall@gibsonsheat.com
November 2001
January, 2002
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