While sometimes it can be obvious if a worker is an employee or an independent contractor, it is not always clear cut. There are many shades of grey in this area of the law. For this reason, organisations need to carefully consider the classification of each worker before entering into an employment agreement or contract for services. Ultimately, each situation will need to be evaluated on its own facts.
Helpfully, legislation and case law provide some valuable guidance in this area. We summarise this below, and also consider some recent developments from both here and overseas.
Nature of the relationship
In assessing whether a worker is an employee or an independent contractor, section 6 of the Employment Relations Act 2000 requires the Employment Relations Authority or Employment Court to determine “the real nature of the relationship” between the parties, having regard to all matters, including the intention of the parties. These matters may include, for example, the terms of the contract or the ways that the parties behaved in implementing and performing the contract.1
The Courts have taken this a step further and have developed a test to assist in determining the “real nature of the relationship”.2 We summarise this test below.
| Indicia | Employee | Independent Contractor |
|---|---|---|
| The hirer has the right to control the way that work is performed |
Yes |
No |
| The worker is integrated into the hirer's organisation | Yes | No |
| The worker is required to wear a uniform and/or display material that associates them with the hirer's business | Yes | No |
| The worker supplies and maintain their own tools or equipment | No | Yes |
| The worker is paid according to task completion rather than receiving wages/salary | No | Yes |
| The worker bears financial risk of loss and/or has the ability to control profit | No | Yes |
| The worker is free to work for others at the same time | No | Yes |
| The worker can subcontract the work or delegate the performance to others | No | Yes |
| Tax is deducted by the hirer from the worker's pay | Yes | No |
| Business goodwill accrues to the hirer | Yes | No |
| The worker receives paid holidays or sick leave | Yes | No |
| The agreement describes the worker as an independent contractor | No | Yes |
As you can see, the checklist combines the question of control, integration, and economic reality.
Essentially, the more control that a worker has over the way they work and how much they earn, the more likely that they will be an independent contractor. Similarly, the more control that a company has over a worker, the more likely they will be an employee.
While helpful, the checklist is not on its own determinative. There are examples where a worker will tick one or two boxes indicating an employee, however, the true nature of the relationship may be determined as being independent contractor and principal. For example, a courier driver wears a uniform (indicative of an employee), however, courier drivers have long been recognised as independent contractors. Each case will be unique to its own facts and circumstances.
Recent developments
This topic has recently been in the employment law spotlight both in New Zealand and overseas with varying outcomes. Most recently, the Employment Court in New Zealand held that a builder was an employee despite the parties agreeing that he was a contractor for three years prior. 3 The Court applied the questions set out in the table above and almost all signs pointed to the relationship being one of employee and employer. For example, the builder was not required to provide his own tools, and there was also no evidence to suggest that he was able to subcontract or delegate his work. In her judgement, Chief Judge Inglis said that “proper categorisation depends on the nature of the relationship and the way it operates. It does not depend on the convenient application of a name tag.”4
This categorisation has also been discussed in response to the increasingly popular gig economy; in which flexible or freelance workers have the freedoms of a contractor, but some of the rights of an employee.
A good example of this is delivery driver services, like Uber. In December 2020, the Court in New Zealand held that an Uber driver in Auckland was an independent contractor.5 This was based on the fact that the driver was operating his own business at the time and in the manner he wished, and he was not directly controlled by Uber beyond using its brand. While the Court was not saying that all Uber drivers in New Zealand are contractors, this decision is certainly an indication of the current position in New Zealand.
On the contrary, the United Kingdom Supreme Court earlier this year ruled that an Uber driver was an employee. Similarly, across the ditch, the Australian Fair Work Commission recently ruled that a Deliveroo driver (similar to an Uber Eats driver) was an employee.6 While it is difficult to get the distinction right, and of course every decision will fall on its own facts, these overseas decisions suggest that New Zealand's approach may change in the years to come. It is also noted that, in 2019, the Government released a discussion document for public comment regarding potential changes to the law designed to increase protections for independent contractors 7. Therefore, one way or another, this is certainly an area to watch.
Why is this important?
Wrongly classifying workers can have serious consequences. If an independent contractor is classed as an employee, a suite of protective employment laws will apply, such as the right to holiday pay and to bring a personal grievance. Contractors, on the other hand, are essentially self-employed and are not covered by employment laws unless otherwise agreed. Getting it wrong can expose businesses to serious liability and also prevent workers from receiving basic protections.
Footnotes
1 Bryson v Three Foot Six Limited (No 2) [2005] 3 NZLR 721 at 32.
2 Leota v Parcel Express Limited [2020] NZEmpC.
3 Barry v C I Builders Ltd 2021 NZEmpC 82.
4 Above, at 67.
5 Arachchige v Rasier New Zealand Ltd & Uber B.V <[2020] NZEmpC 230 EMPC 211/2019.
6 Franco v Deliveroo Australia Pty Limited [2021] FWC 2818.
7 Better protections for contractors: Discussion document for public feedback, Ministry of Business, Innovation and Employment, November 2019. [33]
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
