Many organisations may seek to engage labour on a ‘contracting’ basis, rather than as employees, believing this offers a greater degree of flexibility within the workforce, while reducing the usual risks and liabilities that occur in traditional employment models. However, while ‘contracting out’ is well established in many industry sectors, the fact that the parties have formed a relationship under an independent contractor agreement does not in itself prove that an employment relationship does not exist.
At any time during the period of the contract/relationship, the contractor has a legal right to challenge the true nature of the relationship – this being to claim that ‘for all intents and purposes, they are an employee’.
This challenge can be made under the provisions of The Employment Relations Act 2000, providing the claimant with the same mechanisms (access to mediation services from MBIE, ability to raise claims within The Employmen Relations Authority or Employment Court) and if successful in their claims, to seek the same remedies as any other employee who has been unjustifiably disadvantaged and/or dismissed within their employment (compensation for hurt and humiliation, lost wages and annual, sick and payment for public holidays)
Frequently Asked Questions.
What is an Independent Contractor Agreement?
Under current legislation within New Zealand there are two primary forms of engaging labour, these being:
1.A Contract OF Service – more commonly referred to an Individual Employment Agreement (IEA). A relationship under an IEA is formed between an Employer (The Company) and an individual (The Employee)
2.A Contract FOR Service – frequently referred to an Independent Contractor Agreement (ICA). A relationship formed under an ICA exists between a Principal (The Company) and the Contractor. The full terms and conditions of an IEA are covered under employment legislation (The Employment Relations Act 2000, The Holidays Act 2003 and The Wage Protection Act 1983) whereas the terms and conditions of an ICA fall under the provisions of relevant Commercial Law.
What is the difference between a contractor and an employee
A genuine contractor will be engaged to provide a particular service, generally for a defined period, and may use other parties (their own staff or other sub-contractors) to complete the responsibilities. The contractor has a high degree of control over how they complete the responsibilities, has discretion around the hours of work, provides many of their own resources and equipment to undertake the work and holds a higher degree of financial risk in engaging in the activities.
An employee is engaged within a defined role, has established hours in which they are to work, operates under the clear direction of the employer “how, when, and where”, has all tools and resources needed to complete their responsibilities provided by the employer, bears none of the financial risks associated with the operation of the company and cannot reassign their duties to others without the prior authority of the employer.
What are the risks if a contractor is found to be an employee
An Independent Contractor, who is successful in challenging their employment status, has a right to claim backpay for:
- Wages – the minimum wage for all hours worked since the commencement of the contract.
- Annual leave – at a rate of 4 weeks for each year completed, or 8% of total gross earnings.
- Paid sick leave – where they were previously unable to work due to injury or illness.
- Pay for all unworked Public Holidays that have occurred during the period of their engagement with the company.
How do I know if the contractor is really an employee
Employment Case law has reinforced the principles applied to determine the true nature of the relationship (Contractor or Employee). An example of this is evidenced in Barry v CI Builders [2021] where Mr Barry, who had signed an independent contractor agreement and had worked for CI Builders for three years, successfully claimed that he was in fact an employee.
In this Case the Employment Court used the same principles they had in other high-profile decisions (including the frequently referenced Leota v Parcel Express Limited [2020]) in confirming that Mr Barry:
- Generally worked 40 hours each week, he didn’t work for anyone else therefore making it unrealistic that he could work for others at the same time.
- Was provided with most of the tools he used on site, and that he drove a CI Builders branded van indicating he was well integrated into the business.
Wasn’t required to issue invoices for hours worked but was paid weekly on the basis of the hours worked, rather than on completion of tasks.
Did not hold any commercial risk, nor did he have the ability to make a profit by completing his work more efficiently.
And very importantly, nothing externally differentiated Mr Barry from any of the actual employees working for the company.
This case, along with others previously, clearly demonstrates that the true nature of the relationship is not defined by the type of contract signed, but rather the custom and practice of the parties after the contract comes into place.
Where can Russell Drake Consulting assist companies to avoid or assess the risks and liabilities associated with an Independent Contractor ‘employment’ claim.
At RDC we have significant experience in assisting businesses to establish genuine contractor arrangements (including drafting robust Independent Contractor Agreements), in analysing the true nature of a relationship if this is challenged at any time and providing representation to Companies in all aspects of a challenge process.
Please feel free to give us a call with respect to any issues arising.