News Article

latest news in employment law

Independent Contractors

Published 01 Jun 2010

There has been a major shift in legal thinking in recent years and consequently the rules, on when a contractor can be engaged by a business owner, or when the relationship should be categorized as an employee relationship.

When Cunningham v TNT Express Worldwide (NZ) Ltd [1993] was the leading case, the Court of Appeal took a classical approach to contract and based its' decision upon the intention of the parties as expressed in the written document they had created. The Court expressed the view that there was no need to examine evidence beyond the clearly expressed agreement. Whilst this view seems entirely sensible, it no longer represents the law.

This distinction regarding who is a contractor and who is not has a major impact on taxation given withholding tax is only 20%, and also importantly on when a dismissal can be effected, and when holiday pay and other compulsory benefits are required. Independent Contractors are not covered by the Employment Relations Act.

Get it wrong and it can hurt. So a crucial piece of advice is to take counsel early, pay for an opinion, and do not count on every IRD front line staff knowing enough to decide the matter. This is a complex decision, many judges have differing views on what is acceptable as a contractor and what is not.

Often the business aims you have can be met via an employee's contract. A trial period can be used if you have fewer than 20 staff and this entitles you to dismiss without any legal right of the employee to raise a personal grievance in the first 90 days.

If you have more than 19 staff, then Employers Assistance Limited (EAL) can manage the employment problems you may encounter in a cost effective manner by providing full HR services for you on call, every step of the way, whist having no permanent staff. There are payroll firms and accounts who can easily process the holiday, and sick leave etc records.

The ultimate decision is made by judges NOT the I.R. Dept.

Here is a summary of the definitive decision.

Bryson v Three Foot Six Ltd - [2005] 3 NZLR 721
Supreme Court of New Zealand [2005] NZSC 34
8 April; 16 June 2005
Elias CJ, Gault, Keith, Blanchard and Tipping JJ

In this case NZ's highest Court upheld the decision reached by the Employment Court (which had been overturned by the Court of Appeal, and was contrary to the original Authority decision- so not a lot of agreement between the Judges on this crucial legal issue, and incidentally a fundamental way of administering the law).

One point to note in passing is: this type of legal question can OFTEN generate litigation because there is often a claim considered when ever work is ended.

The Supreme Court approved of the following guidelines:

(unanimously) Section 6 of the Employment Relations Act required the Employment Relations Authority and the Employment Court to consider all relevant matters in deciding whether a relationship was one of a contract of service or a contract for services. This required the determination of a question of fact, including whether the terms of the written agreement reflected the reality of the relationship."

What does that mean?
Well... it means that the contract you draw up is not the end of the discussion no matter what terms you create in the document. What it means is that a Judge will look at all the elements of the relationship:
The contract;
Industry practice;
The control test; (how much control over how the work is done is there, what degree of control is there?)
The integration test. (How integrated into your business is the worker?).
Section 6 of the Employment Relations Act states:
"The Court.... Must determine the real nature of the relationship between them".... The court must consider all relevant matters, including any matters that indicate the intentions of the persons; and is not to treat as a determining matter any statement by the persons that describes the nature of their relationship"

We have outlined this for you because it is absolutely critical as to whether you sink or sail on legally.

In other words, no matter what you put in a document or any verbal statement you make the Court will look into the REAL NATURE of the relationship.

So what is the real nature?
One of the main tests is:
Was the person in business on their own account ?, (the fundamental test – created by Cooke J in Market Investigations Ltd v Minster of Social Security [1969] 2 QB 173, 184-185. ) Accepted by the Supreme Court.

Does the person have control over the customers, did they control pricing, did they have a "business" they could on-sell?
Did the worker receive income from profit or loss, or piece rate i.e. commission or salary / wages?
Can the person ask another to perform the work?
Who supplies the tools and products needed to complete the work?
Is the work to be done fundamental to the associated business or ancillary?
Who pays the taxes? Is the person GST registered?
How is the relationship ended, is there an agreed process?
In our opinion, the more hours a worker spends working for you the more likely they will be in a legal position to claim they are an employee. If a worker workers 40 hours or more for you, with no other income you will be very hard pressed to claim they are contractors given the nature of the business relationship you have intended.
The less a worker works for you and the more s/he has other sources of income the more likely you could be to establishing a contractor relationship. But, even this is not definitely as it may be ruled the person is a part time employee given the relationships that exist between customers, pricing, the work content and especially the products.

So... what we recommend you do is take a step back and decide whose business is it?

The Employment Court has rejected a submission that there are categories of workers whose "real" status is that of employee, irrespective of what is provided in the contract (Davis v Canwest Radioworks Ltd (Employment Court, Auckland AC 21/07, 4 May 2007, Judge Travis)). Judge Travis held rather that:
[8] I am not persuaded that this... point is supported by the authorities or the wording of s 6. It suggests the category of the employees is paramount and decisive. Where the parties have reasons for entering into independent contracting arrangements, other than thwarting the right of the employee to access the grievance provisions of the Act, and where there is a measure of equality of bargaining strengths, that policy consideration is likely to be less relevant.
What, then, is the significance of the new statutory direction, in terms of the policy above, to determine the "real nature of the relationship" and, in this respect, to consider all relevant matters including intention but not to treat descriptions of the nature of the relationship as being conclusive?
As the majority of the Court of Appeal put it in the Three Foot Six decision, above:
[79] The policy underlying s 6 is to stop employers inappropriately limiting the reach of the Employment Relations Act by resort to artificial contractual form. This policy and the requirement to focus on 'the real nature of the relationship' presuppose that there are categories of workers whose 'real' status is as employees irrespective of what is provided for in contractual terms which define the relationship.
The Supreme Court held that the statement in the agreement that the appellant was an independent contractor was not to be treated as determinative, and "[in] that respect s 6 confirms what is to be found in [Cunningham]" (Bryson v Three Foot Six Ltd (2005) 2 NZELR 135 (SC) at para [32]). The Employment Court was held to have correctly applied the common law tests, including the "fundamental" or "economic reality" test (at para [33]). The evidence of invoicing of the appellant's services and of taxation arrangements was held not to provide any support for the respondent's case (at para [39] "because those arrangements appear to have been mere consequences of the contractual labelling of him as an independent contractor" (at para [37]). The same conclusion was reached in Tsoupakis v Fendalton Construction Ltd (Employment Court, Wellington WC 16/09, 18 June 2009, Chief Judge Colgan), where the plaintiff worked at a fixed hourly rate, precluding any opportunity to profit from the relationship, and was supplied with tools and materials thus taking no financial risk.

In a decision involving the disputed employment status of a telemarketer, features of the relationship held to be consistent with a contract of service (non-registration for GST, regular and predictable weekly income and an intended degree of supervision) were held to be outweighed by a number of features indicating that the economic reality of the relationship was that of a contract for services (Cardy Business Ltd v Bizaoui (Employment Court, Auckland AC 16/05, 24 March 2005, Judge Colgan)). These countervailing features included deduction of withholding tax; the ability to deduct retainers paid from commission earned; description of the defendant as an "agent" and a "consultant"; the absence of any requirement to complete time sheets; training supplied by an external party with whom the defendant dealt directly, rather than the plaintiff; the ability to work as a telemarketer elsewhere, and to conduct independent sales businesses, during the lifetime of the contract; and the use of the defendant's own vehicle, without reimbursement of expenses.
In Raine Blackadder Ltd v Noonan (Employment Court, Christchurch CC 3/06, 16 March 2006, Judge Couch), a person who registered for GST, paid her own ACC levies, and was paid on the basis of GST invoices was nevertheless held not to be in business on her own account given that she worked solely for the plaintiff, using the plaintiff's equipment and lacked scope for increasing her income through her own efforts.

Similarly, in Clark v Northland Hunt Inc (2006) 4 NZELR 23 (AC66/06), where the plaintiff, a huntsman, was responsible for the cost of feeding hounds, providing and maintaining his horses and riding regalia, and associated maintenance expenses, the Court held that "his responsibility to meet many of the expenses himself is totally inconsistent with a contract of service" (para [18]). The actions of the plaintiff in structuring his engagement as a separate business and taking advantage of the status to minimise his tax liabilities over many years was held to be a substantially persuasive factor in finding the plaintiff to be self-employed. Similarly, evidence of "freelance" independent contracting status was described as "overwhelming" in a case where the plaintiff had structured his business operations, including GST registration, to obtain the maximum advantage from self-employment status (McGreal v Television New Zealand Ltd (2007) 4 NZELR 345 , applying Cunningham, above). The same conclusion was reached in Davis v Canwest Radioworks Ltd (Employment Court, Auckland AC 21/07, 4 May 2007, Judge Travis), where the original contract for the performance of work lay between the plaintiff's company and the defendant. McGreal was distinguished, however, in Kiwikiwi v Maori Television Service (2007) 5 NZELR 6, where the plaintiff was not registered for GST, had no separate accounts and did not operate under a business entity such as a company. Tax invoices were held to demonstrate only that the plaintiff was a person of considerable naivety about taxation and other business matters.
Thus, evidence that the contract has been structured and managed in an entrepreneurial way, so as to enable the per-son performing the work to make a profit on a notionally self-employed basis, has been particularly persuasive in a number of decisions under the ERA. Most recently, in Singh v Eric James & Associates Ltd [2010] NZEMPC 1, the Court held that a plaintiff who took substantial business risks of a type not seen in employment relationships, "but equally had the opportunity to take significant benefits in a way also not seen in employment relationships", was an independent contractor.
In McLean v Buy West Realty Ltd (2006) 4 NZELR 193 (AC58/06), the Court held that the employment status of branch managers, as well as commission only salespersons, was covered by s 51A of the Real Estate Agents Act 1976 so that the plaintiff was deemed to be an independent contractor (para [68]: see further para [ERA6.34]). In obiter comments, however, Judge Shaw went on to state that, without the effect of the 1976 Act, there was no sense in which the plaintiff could be seen to be operating his own business. He used his own car for little more than driving to and from work. He could not hire or fire staff and "the only financial risk he took was related to the profitability of the branch which dictated the bonus he would receive". Despite the "hypothetical" flexibility of time available to him, he usually worked a six day week and "the reality was that he was a full time manager answerable to the owners of the business" (at para [101]).

When considering hiring the services of an Independent Contractor see our publication for the steps to take to protect your business and the contracts to use; Independent Contractors eBook. (free to Employer Support Package members).