• Facebook
  • Twitter
  • Youtube
  • LinkedIn
Parry Field Lawyers
  • Home
  • About
    • Insights
    • Terms of Engagement
    • Testimonials
  • Our People
  • Services
    • Property Law
      • Residential Property
      • Property Construction
      • Commercial Property
        • Property Leasing
      • Subdivisions
      • Community Housing Information Hub
    • Advisory
      • Employment Hub
      • Sale and Purchase
      • Financing
      • Governance
      • Technology/ IT
    • Disputes
      • Court. Tribunals, Arbitrations
      • Estates and Wills
      • Divorce and Separation
      • Insurance
      • Employment Hub
      • Family
      • Company and Shareholding
      • Debt Collection
      • Construction
    • Trusts and Asset Planning
      • Wills and Enduring Powers of Attorney
      • Estates
      • Succession Planning and Asset Protection
      • Trust Management
    • Charities/For Purpose Organisations
      • Charities: Information Hub & Healthchecks
      • Governance Essentials
      • Incorporated Societies: Information Hub
      • Faith Groups: Information Hub
      • Impact Investing: Information Hub
      • Social Enterprises/Impact Companies
      • Start-ups and Capital Raising Hub
      • Schools & Education: Information Hub
    • Immigration and Migrants (移民)
      • Work Visas 工签
      • Family Visas 家庭签证
      • Skilled Migrants 技术移民
      • Business and Investment Visas 生意与投资签证
      • Potentially Prejudicial Information 回复移民局质疑 (PPI)
      • Employer Assistance 雇主协助
      • Overseas Investment 海外投资
  • Resources
    • Guides
    • Articles
    • Courses
      • Governance 101
    • Case Studies
    • Blog
      • Aotearoa Impact Sector Updates
    • Templates
      • Terms and Conditions
      • Terms and Conditions Including Software
      • Non-Disclosure Agreement – One Way
      • Non-Disclosure Agreement – Two Way
      • Independent Contractors Agreement
      • Shareholders’ Resolutions – Written resolution
      • Share Transfer
      • Incorporation – First Shareholder Resolutions
      • Incorporation – First Directors’ Resolutions
    • Videos
      • COVID-19 and Commercial Leases
      • Force Majeure” clauses in Contracts and COVID-19
      • Property sale and purchases and COVID-19
      • Seeds Podcast
  • Careers
    • Summer Clerk Programme
  • Contact
    • Healthcheck
  • Pay Online
  • Search
  • Menu Menu

Contractor vs Employee: The Grey Zone

Employment

Looking to hire a contractor but not sure whether they might be an employee instead?  This article looks at the difference between employees and contractors and the tests that are used to help work out which is which.

It’s important to get it right as employees have minimum entitlements, such as the right to receive at least the Minimum Wage; leave entitlements and the right to only be terminated in certain circumstances and subject to a fair process.

What is the difference?

On the face of it, the definition of contractors and employees don’t seem too different.

An employee is a person employed by an employer to do any work for hire or reward under a contract of service (an employment agreement).  It includes a homeworker or a person intending to work but excludes volunteers and certain persons engaged in film production.

A contractor is engaged by a principal to perform services under a contract for services (an independent contractor agreement), earning income by invoicing the principal for their services.

However, where there is a dispute as to whether someone is a contractor or an employee, several legal tests are used to determine the dispute. Each test on its own is not determinative, they all must be assessed together to reach a conclusion.

Intention Test

What the parties intended is relevant to deciding whether the relationship is an employment one.

Generally, intention involves looking at what the parties’ written agreement says. The title of an agreement and specific clauses within an agreement can suggest what the parties intended. Likewise, where an agreement does not have specific clauses is also relevant to intention. For example, an employee’s employment agreement would have clauses relating to leave including sick leave, annual leave, and bereavement leave, whereas this would not be present in a contractor’s agreement.

Control Test

The greater control an employer has over the individual the more likely that individual is an employee. Control will be assessed in relation to work content, hours and methods. Thus, an individual who is set specific tasks to do which must be done in a particular way and whose start times and end times are controlled suggests that they are an employee. If an individual can control their own start times or work on a specific project using their own methods, this is more consistent with a person being a contractor, rather than an employee.

Integration Test

If the work performed by the individual is “fundamental” to the employer, this suggests that the person is an employee.

This is indicated by factors such as team integration, being reimbursed for work-related expenses and wearing a uniform.  Conversely, an individual being paid by results and whose work is not fundamental to the business, but accessory to it, indicates they are a contractor, rather than an employee.

Economic Reality Test  

This test involves looking at the whole working relationship to determine the economic reality.

In particular, a contractor is a person in business on their own account. This means that the individual is not engaged on a continuous basis by one business but is self-employed and contracts out their services to businesses that need them for a particular project or period of time.

A contractor usually charges a fee for their services, whereas an employee is paid a salary or a wage. Employees are entitled to at least the minimum wage, however a contractor can be paid whatever rate is agreed to. An employee’s employer pays PAYE tax and ACC on the employee’s behalf, whereas contractors generally issue invoices setting out their fees and pay their own tax directly to Inland Revenue.

Other factors relevant to the economic reality test include GST registration, the ability to subcontract work, who wears the financial risk in the relationship, and whether the person can work for more than one entity. All those factors are more consistent with a contractor relationship.

Industry Practice

Industry practice can also inform whether an individual is an employee or contractor. While industry practice is not determinative, it can be considered by the Court especially when a custom or practice is well established. It could also help to show the intention of the parties.

Case Example – Employee

Southern Taxis Ltd v Labour Inspector

Southern Taxis Ltd (“STL”) operated a business in Dunedin and employed drivers described as “commission drivers”. The Labour Inspector alleged that four commission drivers were in fact employees and that in some instances they were not paid the minimum wage, holiday pay, sick leave or rest breaks.

The Court had to decide whether the commission drivers were employees or contractors.

Common Intention Test

There were no written agreements between the parties. There was also little evidence of discussions between the parties except that the drivers would be paid 40% of the takings.

Control Test

Each of the drivers operated under a roster which was prepared by STL. The roster would let the drivers know in advance what days of the week they would work and broadly which shift that driver would work. The drivers would have to work the shifts that they were rostered for and their work patterns were similar every week. This suggests a degree of control was imposed over the drivers.

The drivers had to log on and off as well as maintain contact with the dispatcher. A dispatcher would assign work to the drivers and, although the drivers could theoretically decline work, in reality they had no choice if they wished to be paid.

The Court found that the working arrangements of the commission drivers was more controlled than those of independent contractors.

Integration Test

The drivers drove vehicles owned by STL and the company would meet the expenses for the vehicles. Particular clothing was worn by the drivers and the drivers would operate according to a roster.

The Court found that STL relied on the availability of the commission drivers for its business operation. The test supported the conclusion that the commission drivers were employees.

Economic Reality Test

The Court found it was clear that the commission drivers were not in business on their own account as they did not own their own vehicles or pay running costs. They could not subcontract their work.

STL deducted PAYE so the drivers did not make personal tax payments to IR. Furthermore, the drivers were not registered for GST and did not render invoices.

The economic reality test pointed towards the commission drivers being employees.

The result

The Court found that the commission drivers were employees. The employees were paid varying amounts of approximately $13,000 to $32,000 for unpaid entitlements.

Case example – Contractor

Arachchige v Rasier New Zealand Ltd

This case concerned an uber driver, Mr Arachchige. He argued he was an employee of Uber after he was terminated.

Common Intention Test   

There was a services agreement between Uber and Mr Arachchige. This suggests that the relationship was not an employment one. In the agreement it stated that the parties did not have an employment relationship. The services agreement did not require exclusivity of the drivers and there was an lack of clauses expected in an employment agreement, such as performance expectations.

Control Test

Mr Arachchige had a lack of control over his client base and over determining what fare to charge. However, the Court stated Mr Arachchige could charge less than the quoted price but this would have been no value to him, as he had no ability to establish a relationship with the riders and thereby attract future work.

Mr Arachchige could decide to work in peak times and where he would work. He could also choose what car, phone, data plan, insurance and other business support he might use. Mr Arachchige also could share the vehicle with another person to reduce expenses.

Integration Test

Uber drivers carry out work integral to Uber. However, Uber had little control in the way in which drivers carried out their work. This was different from Southern Taxis Ltd where the drivers had little autonomy over the way in which they carried out their business activities.

Economic Reality Test/ Fundamental Test

Mr Arachchige could decide when he undertook his services. He provided all the necessary equipment needed including the vehicle. He was also responsible for his tax obligations.

Result

Mr Arachchige was not an employee of Uber. Thus, he could not claim the rights of employees, such as the right to bring a claim of unjustified dismissal.

Conclusion – Employees vs Contractors

There are various factors to consider when determining whether an individual is an employee or contractor. The Court uses four tests, as well as industry practice, to help answer this question. It is important for employers to get it right because employees are entitled to broader legal rights than contractors, including minimum wage entitlements.

This article is not a substitute for legal advice, and you should consult your lawyer about your specific situation. Please feel free to contact us at Parry Field Lawyers:

  • Hannah Carey Senior Counsel – hannahcarey@parryfield.com
https://www.parryfield.com/wp-content/uploads/2020/04/DSC01286.jpg 1371 2048 Kylie Shipley https://www.parryfield.com/wp-content/uploads/2019/07/Parry-Field-Lawyers-Logo.png Kylie Shipley2022-07-14 14:30:112023-04-21 18:45:56Contractor vs Employee: The Grey Zone

Christchurch CBD

PHONE: +64 3 348 8480
FAX: +64 3 348 6305

PHYSICAL ADDRESS:
Level 1, 60 Cashel Street
Christchurch 8013, New Zealand

POSTAL ADDRESS:
PO Box 744
Christchurch, 8140, New Zealand

Christchurch

PHONE: +64 3 348 8480
FAX: +64 3 348 6305

PHYSICAL ADDRESS:
1 Rimu Street, Riccarton,
Christchurch 8041, New Zealand

POSTAL ADDRESS:
PO Box 8020, Riccarton,
Christchurch, 8440, New Zealand

Rolleston

PHONE: +64 3 348 8480
FAX: +64 3 348 6305

PHYSICAL ADDRESS:
Level 1, 80 Rolleston Drive,
Rolleston, 7614, New Zealand

POSTAL ADDRESS:
PO Box 8020, Riccarton,
Christchurch, 8440, New Zealand

Hokitika

PHONE: +64 3 755 8673
FAX: +64 3 755 8073

PHYSICAL ADDRESS:
127 – 137 Revell Street,
Hokitika 7810, New Zealand

POSTAL ADDRESS:
PO Box 44,
Hokitika 7842, New Zealand

Parry Field Charitable Foundation

Parry Field charitable members of NZ LAw, Global Cross Legal and SCLA

© Copyright – Parry Field Lawyers     |     Privacy Policy

June 2022 Impact Sector Update CallPreliminary Decisions in Employment Dismissals – Are they required?
Scroll to top