Employee or contractor 30 May 2013

You may have hired a worker as a contractor or have begun working as a contractor, but the Courts may see the relationship differently to you. Instead, the Court may decide that the relationship was rather one of employer-employee. This can have significant implications, as outlined below.

In deciding this issue, the Court has to consider the “real” nature of the relationship. To this end, the Court:

• Must consider all relevant matters, including any matters that indicate the intention of the parties; and

• Are not to treat as a determining matter any statement made by the parties that describes their relationship (e.g. if the contract describes one party as a contractor).

So what is the distinction between an employee and a contractor?

The distinction usually lies in whether the person is performing the services as a person in business on his/her “own account. If they are in business on their “own account”, they will usually be an independent contractor.

The Courts have developed a variety of tests over the years to assist in assessing the relationship. Examples of these include:

• What degree of control does the employer have over the work done and the way in which it is performed? The more control an employer has, the more likely it is to be an employment relationship.

For example, if the worker is required to work set hours, is not able to sub-contract the work out to anyone else, is unable to work for other competing businesses, is required to follow workplace rules and is closely monitored, this is may suggest that the “contractor” is actually an employee.

• Is the person a fundamental part of the business – are they “part and parcel of the organisation” or do they merely have an ancillary role?

The more integral to the business, the more likely you are to be an employee.

• Was the person performing the services on his/her own account or as part of the business?

For example, if the worker is providing his/her own tools/equipment, is invoicing the organisation, is able to hire his/her own labour and is responsible for his/her own tax and ACC payments, this may suggest that the worker is a contractor.

Why should this distinction be of a concern for me?

If you engage a worker as a contractor but then, later, that worker is held to be an employee, the following flow-on effects could occur:

• You or your organisation/company could become liable for backdated holiday pay and sick pay from the commencement of the services;

• The tax position will be reassessed. You may become liable for tax.

• The worker will be able to follow all of the processes contained in the Employment Relations Act 2000 including bringing a personal grievance against you/your organisation.

Vice versa, if you are performing work as a “contractor” but fail to see how your situation is any different to a regular employee, you may be missing out on employment entitlements which you are legally entitled to such as holiday pay/leave, sick pay, bereavement leave, kiwi-saver contributions and minimum wage entitlements. You may also believe that you are prevented from bringing a personal grievance against your “employer”.

If you are intending to take on a new worker and wish him/her to be a contractor, at a minimum you should ensure the following:

• That there is a “contact for services” contract in place (we can draft an appropriate document for you);

• That the person is invoicing you/your company for the services provided and payment is made on receipt of an invoice. The person will need to be responsible for their own tax and ACC payments;

• That you do not exercise too much control over the services and how they are being provided e.g. make sure there is flexibility in terms of when the services are to be performed and allow the person to undertake other work (even if it for a competing business);

• That the person provides his/her own equipment/tools (where appropriate).

If you are currently contracted as a “contractor” and are unsure whether in fact you should be classified as an employee, we recommend that you raise this with the business you work for and/or contact us for further advice.

Should you need any assistance with this, or with any other Employment matter, please contact Lois Flanagan at Parry Field Lawyers (348-8480).