Author: Matthew Ockleston
The question of whether workers are employees or independent contractors is vital in determining their rights, and the obligations owed by their employers or principals.
This article considers recent cases on the employee/contractor distinction decided under the ERA, and the various factors which have arisen from these cases, to identify practical measures that can assist in preserving the legal status of contractors.
ERAThe ERA provides, in section 6(2), that "the real nature of the relationship" between two parties determines whether a worker is an employee or a contractor. The ERA requires the Employment Court or Employment Relations Authority to "consider all relevant matters, including the matters that indicate the intentions" of the parties, when determining "the real nature of the relationship".
ERA provides that "any statement … that describes the nature of the relationship" is not to be a determining factor. Contrary to the views of some commentators, the ERA does not substantially alter the law on this issue from that under the Employment Contracts Act 1991. The leading case - TNT v Cunningham [1993] 3 NZLR 681 (CA) - made it clear that labels or statements regarding a person's employment status are not determinative of that issue, although they will be relevant.
What, then, are the factors that the Court or Authority will take into account in determining whether someone is an employee or a contractor? To date there have been three significant decisions by the Authority on this issue. No appellate decisions on this issue have been released, so there has been no indication of the Court's view on this issue.
Recent Authority DecisionsThe three recent cases under the ERA are:
Stubbs v Kimihia Home & Hospital (AA 11/01), where a part-time maintenance man at a rest home was initially engaged as a contractor. He alleged unjustified dismissal after he unsuccessfully applied for a full-time maintenance position (as an employee); Hook v JB's Contractors Ltd (AA 21/01), involving a building contractor, who challenged his dismissal after a complaint of misconduct; and Ashby v Corporate Cabs Ltd (AA 24/01), concerning a taxi franchisee, who claimed that his employment conditions had been unilaterally altered by the taxi company.In these cases, the Authority considered:
the parties' intentions; whether the worker was "in business for himself"; the level of control exerted by the alleged employer; and the taxation treatment of the relationship;The Authority made it clear in these cases that the factors to be considered had not changed from under the previous statutory regime.
Looking at each of these factors in more detail.
Parties' IntentionsThe type of relationship the parties intend to create is always highly relevant. In Hook, the Authority noted that:
a detailed written contract "will usually go a long way to establishing the intention of [the] parties", although it is not determinative; and intention may be shown by the parties' statements, their conduct, or "the context of the commercial environment in which the contract is made". Where no contrary intention is evident, it may be assumed that the parties intended to create the type of relationship which is usual in the particular industry. In Stubbs, the Authority found that:
the parties' conduct showed that their intentions had changed over the course of Stubbs' 'employment'; and an initial intention by the worker to enter into an contractor relationship evolved over time to an intention to form an employment relationship."In Business For Himself"This factor recognises that contractors are running their own business, and appears to be the single most decisive factor in determining employee/contractor status. In assessing whether a worker is "in business for himself", the Authority will consider such issues as:
who provides the equipment; the extent of any direct involvement by the principal in how the worker carries out his duties; whether the duties can be delegated or sub-contracted; who bears the financial and legal risk; and whether the worker can profit from sound management in performing his duties.ControlThe level of control exercised by the principal appears to have become less influential in the recent cases. Although high levels of control are typical in an employment relationship, evidence of control does not necessarily mean the relationship is one of employee and employer.
The Court of Appeal noted in Cunningham that the fact that a worker accepts a degree of supervision from someone else in operating his business does not mean that the worker is not "in business for himself". Principals may exercise apparently high levels of control over contractors for legitimate business reasons, without this necessarily indicating an employment relationship. In Ashby, the Authority noted that high levels of control were typical in this industry, but this did not mean that the relationship was one of employee and employer.
Taxation TreatmentThe Authority does not consider the tax treatment of a relationship as a relevant matter. The Authority noted in Hook that tax treatment is the result of a worker's employment status, not the other way around. The fact that PAYE is being deducted from a worker's income does not mean there is an employee/employer relationship, nor does the fact that withholding tax is deducted mean that there is an independent contractor relationship.
Key IssuesThe recent cases highlight several key areas where potential problems can arise for principals who engage contractors. If these areas are addressed, it is more likely that any subsequent challenge to the contractors' status will be unsuccessful.
There is not only a risk of workers challenging their own employment status, but of unions or Labour Inspectors using their ability under s 6(5) of ERA to seek a declaration from the Authority that 'alleged contractors' are, in fact, employees. Although the workers' written consent is required, there is an incentive for contractors who wish to be employees to have their employment status determined for them at someone else's expense.
Full Written AgreementOne of the most effective methods of evidencing that a worker is a contractor is a full written agreement which sets out the "real nature of the relationship". Cunningham and Hook establish that a review of an agreement is the primary method of determining employment status. Although not determinative, any statements by the parties regarding the nature of their relationship will be of assistance in establishing their intention. Written terms also minimise the potential for conflicts of evidence at a later stage about what was agreed or the parties' rights and obligations.
Actions speak louder than words, however. The parties should adhere strictly to the written agreement. The Stubbs and Hook cases show that, if the agreement suggests one type of relationship, but the parties' conduct suggests another, the Authority will base its assessment of the relationship on the actual conduct.
"In Business for Himself" The recent cases have shown that the key test is whether the worker is "in business for himself". In order to maintain an independent contractor relationship, it must be clear that the worker is running his or her own business. The parties' actual conduct and the written agreement should reflect the key elements of someone running his or her own business, including that the contractor:
provides the equipment, or pays the principal for using the principal's own equipment; can delegate or subcontract its duties to other people; bears the legal risk of carrying out the duties (including, where appropriate, a indemnity from the contractor to the principal, recognising that the legal risk lies with the contractor); and can profit from managing the business efficiently; can delegate to other people, who are approved if necessary by the principal; earns remuneration in such a way to profit from running a more efficient business, by minimising operating expenses.ControlAlthough high levels of control can be suggestive of an employment relationship, they may also be necessary for various commercial reasons, such as:
compliance with contractual obligations owed by the principal to a third party; customer service levels; the nature of the industry and the tasks performed by the worker; and preventing loss or damage to goods.Where apparently high levels of control exist in a contractor relationship, the agreement should record the reasons for this.
ConclusionThe ERA does not appear to have significantly changed the law regarding the employee/contractor distinction. Recent cases show that the factors that the Authority will consider when assessing "the real nature of the relationship" between the parties are largely the same as under the previous legislation. Of these factors, the question of whether the worker is "in business for himself" appears to be the most influential. Principals who engage contractors can minimise the risk of their contractors' status being successfully challenged by ensuring that:
1. they have a full, written Agreement;
2. the Agreement demonstrates that the worker is in business for themselves; and
3. the actual practices of the parties comply with the Agreement.
This is a general summary only and should not be taken as a substitute for specific advice.
This article was also published in Employment Today, October/November 2001
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Clendon Feeney