Contractor or Employee?

When determining whether a person is a contractor or an employee, it is important to focus on the real nature of the working relationship and not just the label that the parties are calling it. The courts have developed several legal tests to help determine the difference between the two, including the intention test, the control vs. independence test, the integration test, and the fundamental/economic reality test.

 

An employee is a person employed to do any work for hire or reward under a contract of services, commonly known as an employment agreement. Employees have all minimum employment rights under employment laws, such as the Employment Relations Act 2000, Minimum Wage Act 1983, and the Holidays Act 2003. These rights include at least the minimum wage, holiday and leave entitlements, and a written employment agreement. Employees also have the right to take a personal grievance.

 

Self-employed people, also known as contractors or independent contractors, are engaged by a principal to perform services under a contract for services, commonly known as an independent contractor agreement. Contractors are self-employed and earn income by invoicing the principal for their services. They are not covered by most employment-related laws, meaning they do not receive annual leave or sick leave and cannot bring personal grievances. They also have to pay their own taxes and ACC levies.

 

The intention test is based on what the parties intended the relationship to be. However, it is important to note that what the parties intended the relationship to be is relevant but does not on its own determine the true nature of their relationship. The wording in the parties’ written agreement can usually provide insight into their intention.

 

The control vs. independence test is based on the level of control exercised over the worker's work content, hours, and methods. The greater the control, the more likely it is that a person is an employee. A worker with greater freedom to choose who to work for, where to work, when to work, and the tools used is more likely to be a contractor.

 

The integration test looks at whether the work performed by the person is fundamental to the employer’s business and whether they are ‘part and parcel’ of the organization. The work performed by a contractor is usually only a supplementary part of the business.

 

The fundamental/economic reality test involves looking at the total situation of the work relationship to determine its economic reality. A contractor is a person in business on their own account.

 

It is important to note that no one test will give the correct answer on its own, and it is necessary to apply all the tests to determine the real nature of the working relationship. If a person is unsure after applying the tests, they can seek assistance from Employment Mediation Services or legal advice.

 

Accidentally classifying an employee as a contractor can have serious consequences for both the employer and the employee. An employer may be held liable for extra costs such as unpaid PAYE tax, unpaid minimum wages, holidays and leave entitlements, and may also be at risk of receiving penalties from Inland Revenue and/or the Employment Relations Authority. Additionally, an employee may miss out on their minimum employment entitlements and KiwiSaver employer subsidy (NZ resident) and may also pay taxes and ACC levies that they should not have to.

 

It is also worth mentioning that sham contracting arrangement happens if an employer deliberately attempts to disguise an employment relationship as an independent contracting arrangement. This is usually done so the employer can avoid their responsibility for employee entitlements. The Employment Relations Authority will not support a sham contracting arrangement and the employer will still have to give the ‘employee’ their employment entitlements. The ‘employer’ may also receive penalties against them.

 

In conclusion, determining whether a person is a contractor or an employee is a complex process that involves considering multiple factors and legal tests. It is important to understand the distinction between the two, as an incorrect classification can have serious consequences for both the employer and the worker. Some of the key factors to consider when trying to determine whether a person is a contractor or an employee include the level of control exercised over the worker, the fundamental nature of the work being performed, and the overall economic reality of the working relationship. Ultimately, the best way to ensure that a person is properly classified as a contractor or an employee is to seek professional advice from Employment Mediation Services or a legal expert.