Even the Courts were confused.
When is a contractor an employee? Or an employee a contractor?
What is the difference?
There are a number of tests the IRD and Courts use to decide. But first let's look at the meaning of each term.
An Independent Contractor is someone who works under a (written) Contract for Service - it's a commercial relationship between the Principal of a company and the person working.
A contractor submits invoices, pays his own ACC, has no entitlement to annual leave, public holidays or sick leave, often provides his own equipment, and in many cases can assign someone else to do the work. He/she may work for other people as well.
An Employee, as defined by the Employment Relations Act, is any person of any age employed by an employer to do any work for hire or reward under a (written) Contract of Service (employment agreement).
So, employees receive paid holidays, are provided with the equipment necessary to do the work, and need to turn up within certain hours as the employer requires.
Why the confusion over the Bryson case then?
Mr Bryson was working in the film industry (on The Lord of the Rings) when his "employment" was terminated and he wished to take a Personal Grievance for unjustified dismissal to the Employment Authority. Of course, only employees can take this action and the Authority initially (Jan 2003) found him to be an Independent contractor - which meant he could not take a PG. Then the Employment Court found him to be an employee; the case went to the Court of Appeal which found him to be an independent contractor, and then finally the Supreme Court (June 2005) determined Mr Bryson was, once more, an employee. Thankfully there was nowhere else to appeal to!
Since that time, this case is used as the basis for determining the status of independent contractors v employees.
Whilst a signed contract stating the person will be a contractor (i.e. the parties' intentions) is one factor taken into account, it is not a complete answer. The Authority can set this aside and look at the real nature of arrangement as follows.
The control test:
Examines the level of control an "employer" has over what work is to be done and how it is to be done on a day by day basis. Control over such matters as materials/tools; hours of work; performance standards; warranties and guarantees; rate and timing of payment
The more control a business owner has over the worker and the work, the more likely the relationship is to be an employment relationship (i.e. employee)
Focuses on the level of dependence of the person's activities and whether they are in business on their own account or whether they are an integral part of the business. An employment relationship is indicated if the business:
Provides the work to be performed; provided the equipment; supervises the work performed; bears the cost associated with finding of and performing of the work; insures and indemnifies the service it provides; is readily identifiable as the service provider and no independent operation is discernable
Looks at who has taken on the risk associated with venturing into business for the desired gains to assess whether or not the person concerned is in business on their own account. Sharing profits and losses.
How independently the individual works:
Can they work for other people; do they supply their own equipment; do they invest or risk their own money in the activity? Are they effectively in business for themselves?
What do the parties themselves intend the arrangement to be? Has it changed over time?
The Supreme Court emphasised the importance of looking at all relevant matters to determine the real nature of the relationship between the parties. "All matters" included the contract, the way in which it actually operated in practice, the parties' intentions, the application for the common law tests, and if present, industry practice.
Employers should be careful when thinking of taking on a contractor - what are your reasons? Avoidance of paying holiday and sick pay? Ability to terminate the contract at short notice and without giving reasons? Performance management? Are there elements in your contract that are indicative of an employment relationship?
When you take on a contractor, it's usually at a higher hourly rate than if the person were an employee - you compensate them for not paying holiday pay, sick leave, kiwisaver etc. And they can usually work for others.
But, if one of your contractors is found to be an employee, no matter what your intentions, you could be liable to pay at least the additional 8% for holiday pay, and are then exposed to the possibility of the Personal Grievance process. Is it worth it?
Always take professional HR advice to ensure it you are not risk of doing the wrong thing. Call Paddy Battersby on 838 6338 to make sure you have the right contract.
Footnote - it was interesting to know that after the Bryson case, most of those people now working on the movie The Hobbit were taken on as independent contractors - you may remember the law was changed to allow this...
Battersby HR Consulting provides practical, on-call HR advice to employers without their own Human Resources team. Call Paddy on 09 838 6338
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