24.06.2014

‘They’re Contractors Not Employees’ – Really?

How can you tell whether a person is an employee or contractor?

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.

Do you need expert legal advice?
Contact the expert team at Hesketh Henry.
Kerry
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

Related Articles / Insights & Opinion

Fern forest NZ
Bioenergy in New Zealand: Fuels for the Future?
The energy transition from combustion fuels to low carbon alternatives is viewed as critical in the race to cut global CO2 emissions and reach climate targets.  We look at some of the opportunities p...
14.11.2023 Posted in Business Advice & Climate Change & Forestry
Will Wide BW
A well drafted will is a craft
The New Zealand do-it-yourself “DIY” attitude and way of life is not limited to home improvements, but sometimes also extends to wills.  Recently we had a DIY $5.99 fill in the blanks will acros...
07.11.2023 Posted in Private Wealth
rsz large pillars
Health and Safety: The Consequences of Dishonesty
Siddhartha Gautama said that lies are like huge, gaudy vessels, the rafters of which are rotten and worm-eaten, and that those who embark in them are fated to be shipwrecked.  Two remarkable health a...
03.11.2023 Posted in Employment & Health & Safety
Properly sequencing your Construction Adjudications: Henry Construction Projects Ltd v Alu-Fix (UK) Ltd
According to the UK’s Technology and Construction Court (TCC) (in Henry Construction Projects Ltd v Alu-Fix (UK) Ltd [2023] EWHC 2010) valid payment claims must be paid before the underlying merits ...
30.10.2023 Posted in Construction & Disputes
Key change to rules on distribution of surplus assets under the new Incorporated Societies Act 2022
On 5 October 2023, the new Incorporated Societies Act 2022 (2022 Act) came fully into force, replacing the Incorporated Societies Act 1908 (1908 Act). One of the key requirements under the 2022 Act is...
18.10.2023 Posted in Business Advice
Construction Framework Wide BW
Major milestone passed – NZS3910:2023 expected in time to fill Christmas stockings
As the most widely adopted standard form construction contract in NZ, NZS 3910 was more than ready for updated conditions given the changes in the industry since its last review in 2013.  After almos...
09.10.2023 Posted in Construction
Time is money – availability provisions in employment agreements and the requirement to compensate
What happens when an availability provision is non-compliant because it does not allow for compensation, but the employee is not “required” to work additional hours?  Can the employee still be sa...
21.09.2023 Posted in Business Advice & Employment
SEND AN ENQUIRY
Send us an enquiry

For expert legal advice, please complete the form below or call us on (09) 375 8700.