Employee vs. Contractor—can you really put a label on it?
An earlier version of this article was featured in the winter edition of Anderson Lloyd’s Employment Newsletter. The law discussed will be relevant to many of our rural sector clients. If your business regularly engages contractors (or engages the same contractor regularly) you may be at risk of those individuals making a claim against you alleging they are actually employees. If they were found to be employees your business could be liable for a significant sum including for six years of holiday pay, paid breaks, and other entitlements.
The contractor versus employee debate continues. Two recent Employment Court judgments released in short succession provide a helpful restatement of the law on classification as an employee.
In both Leota v Parcel Express Limited and Southern Taxis Limited v A Labour Inspector the Employment Court found individuals engaged as contractors were, in reality, employees. Wrongly classifying workers can have serious implications for businesses, including in relation to tax liability, payment for all statutory benefits applying to employees, and exposure to personal grievances.
You’ve got to look at the facts
In both Leota and Southern Taxis the Employment Court judgments were careful to emphasise that determining how to classify whether someone is an employee or a contractor is “intensely factual”. What that means is each situation needs to be analysed on its individual facts.
For Mr Leota, he:
- signed a contractor agreement which recorded various agreed terms and described him as a contractor;
- was required to purchase his own van, but in fact did so via a loan and an arrangement organised with Parcel Express;
- drove a van emblazoned with the words “Parcel Express”;
- worked a delivery area with boundaries assigned by Parcel Express;
- was required to comply with Parcel Express policies and directions;
- was responsible for his own tax arrangements but was not registered for GST;
- worked exclusively for Parcel Express and was guaranteed a minimum income for doing so;
- could not in reality grow his own business or customer base, or pursue other opportunities;
- was obliged to find a substitute driver for any period he wished to take leave, and could not otherwise take leave without consent; and
- was naïve and had no real understanding of what his status was when working with Parcel Express.
The four Southern Taxis drivers:
- had no written agreements – but had a clear understanding about matters of “usual practice”;
- did not own their own vehicles or pay any of the running costs involved;
- were paid a commission based on 45 per cent of fares taken;
- PAYE tax would be deducted from pay received;
- maintained a logbook or other record of hours worked, rest periods taken, and fares taken;
- operated according to a roster;
- operated branded vehicles and wore stipulated clothing; and
- were subject to significant control, carried only modest risk themselves, and were part and parcel of Southern Taxi’s business operation.
After analysing the above the Employment Court in both cases concluded the real nature of the relationship was that of employer and employee.
The Employment Court is not saying “all courier and taxi drivers are employees”. However it is a warning that those roles and industries may be the first cab off the rank.
The fundamental test
The Chief Judge in Leota describes the essential issue as being whether the worker serves their own business or someone else’s business. The following table was included in that judgment, as classifying indicators:
|Does the hirer have the right to exercise detailed control over the way work is performed, so far as there is scope for such control?||✔|
|Is the worker integrated into the hirer’s organisation?||✔|
|Is the worker required to wear a uniform and/or display material that associates them with the hirer’s business?||✔|
|Must the worker supply and maintain any tools or equipment?||✔|
|Is the worker paid according to task completion, rather than receiving wages based on time worked?||✔|
|Does the worker bear any risk of loss, or conversely have any chance of making a profit from the job?||✔|
|Is the worker free to work for others at the same time?||✔|
|Can the worker subcontract the work or delegate performance to others?||✔|
|Is taxation deducted by the hirer from the worker’s pay?||✔|
|Does any business goodwill accrue to the hirer?||✔|
|Does the worker receive paid holidays or sick leave?||✔|
|Does the agreement describe the worker as an independent contractor?||✔|
Although the contractor vs. employee debate is nothing new there are potentially serious (and costly) implications for businesses that misclassify workers as contractors.
Some food for thought:
- Other roles and industries might be ‘at risk’ of wrongly classifying workers as contractors. Any sort of contract drivers are an obvious example, but we could see queries being raised regarding rural contractors, cleaners, sharemilkers (although noting the specific operation of the Sharemilking Agreements Act 1937), medical and dental technicians, IT contractors, professional services contractors, and tourism operators.
- It is not always obvious when a contractor is not a contractor. Sometimes the outcome could be finely balanced, and you certainly do not want to end up in the Employment Relations Authority or Employment Court to find out the answer.
- Think about the classification not only at the time of entering an agreement, but also the reality of the relationship as it progresses (or changes).
Want to know more?
If you have any employment law questions, please contact our specialist Employment Team.
This article was included in our 3rd edition of Rural. which you can read here.