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‘They’re Contractors Not Employees’ – Really?

Written by Jim Roberts and Sarah Holderness on June 24th, 2014.

Are your ‘workers’ employees or contractors?  When it comes to termination, you need to make sure you have the classification spot on.  A contractor can be terminated subject to the terms of his or her contract.  An employee, however, can only be terminated if that termination can be procedurally and substantively justified.  This includes the labyrinth of ‘good faith’, natural justice and ‘test of justification’ that permeates employment law.
 
This topic is one we are asked about a lot – how can you tell whether a person is an employee or contractor? 
 
In determining whether or not a person is an employee or contractor, the Authority or Employment Court must determine the “real nature” of the relationship between the parties, and will consider all relevant matters/factors, including the intention of the persons involved.  However just because the parties have expressed in the written documentation that it is an employment relationship, does not make it so; it is simply one of the factors to take into consideration.
 
The Employment Court or Authority will consider (non-exhaustively): 
 
  • The written and oral terms of the contract between the parties, and how the relationship operated in practice.
  • Statements by the parties as to what they considered the relationship to be.
  • The control test - What degree of control does the principal/employer exercise over the person’s work and the manner in which it is to be done?
 The greater the control, the more likely it is that the person is an employee.
 
  • The integration test -  Is the work performed an integral part of the business and has the person effectively become part and parcel of the organisation?  For example, does the person work in an office alongside various other true employees?  Is the person represented to the outside world as being like an employee, for example does he or she have business cards branded with the business’ details like other employees?
The greater the integration, the more likely it is that the person is an employee.
 
  • The fundamental/economic reality test.
Is the person in business on their own account?  For example does he or she provide their own equipment and hire their own helpers as necessary?  Does the person have an opportunity to profit from his/her own endeavours in performing the services for which they have been engaged, and, on the flip side, take any degree of financial risk?
 
If the answers to these questions is yes, it is likely they are in business on their own account; that would favour them being a contractor as opposed to an employee.
 
Note that, due to the fluidity of the factors, the relationship is not static.  It might start out as a principal-contractor relationship, and then morph into an employment relationship if, for example, the principal/employer starts exercising a great deal more control over the contractor/employee’s activities.
 
Bizarrely, sometimes the fundamentals are overlooked in the caselaw:
 
  • A ‘contract of service’ is employment.  It is a personal contract whereby a person agrees to provide his or her service to another, i.e. originally servitude – ‘master and servant’.
  • A ‘contract for services’ is a contractor agreement.  It is not a personal contract but a commercial contract to provide particular services..  It does not require personal service and anyone the contractor nominates can perform the service, e.g. the service may be building a house.
Don’t blame our law or legislators for the distinction as it is not an issue unique to New Zealand.  A lot can hinge on whether someone is an employee or a contractor in overseas jurisdictions such as Australia, England, and the US – for example the ability to challenge dismissal, workers compensation (accident compensation), the right to holidays, health and safety obligations, minimum wages, limitations on hours of work, payment of wages, statutory redundancy rights, and even income tax arrangements.
 
What is clear is that the closer a person is to the core activities of an employer the more likely that person is to be an employee.  If it looks like an employee, smells like an employee and eats like an employee it probably is an employee.  If you have contracted with an individual to work hours that you prescribe, in your workplace, carrying out core functions of your business, it is highly unlikely that person could be a contractor.  On the other hand if you contracted to get a task done, and that person can choose (within reason) when it is done and who can do it, and particularly if it is not core to your business, then it is unlikely to be employment.
 
If you need any advice on your particular circumstances and whether either you, or the people you have hired, are employees or independent contractors, please give us a call.
 
Topics: Employment Law
 
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