Independent Contractor vs Employee

Updated: Sep 29


Note: This article is written in September 2020 - watch out for changes being considered by the current Labour Government which, if enacted, will give Independent Contractors more ‘employment-related’ rights, which may make using them less attractive.


So, who cares about the difference between employees and Independent Contractors?

Well, here’s some who do:


Employment: Employment Relations Authority (‘ERA’)

Employment Court (‘EC’)

Mediation Service

Employment Lawyers and Advocates

Tax: Inland Revenue Department

Financial: Banks (for mortgage eligibility)

Insurance: For public liability cover and professional indemnity

All of them have an interest in whether or not an individual is an employee or an

Independent Contractor.


So what’s the difference between the two?


Employees get:

The protections and benefits afforded by employment law, including (for example):

1. Four weeks paid annual leave (minimum)

2. Public Holidays

3. Sick leave

4. Bereavement leave

5. A fair disciplinary process

6. Training & Development

7. A degree of certainty about their employment

8. Regularity of work, meaning regularity of income

9. Access to the employment law system (mediation, ERA, EC)

10. Redundancy process provisions and (for some) redundancy compensation

These benefits apply to all Full-time, Part-time, or Fixed Term employees (‘casuals’ only get

some of them)


Independent Contractors get:

1. None of the above, which is why business owners are tempted to use them.

2. Independence, which for many individuals means ‘freedom’.

3. Choice, of when they work, and who for.


The employment law system and Inland Revenue have together developed a series of ‘tests’

to be applied in determining who is an employee, and who is an Independent Contractor.

The tests aren’t absolute – the relationship might fail one test but be correct for the others.

It’s a ‘weighting’ game.


1. Intention test:

What did the two Parties freely agree to at the beginning, what did they want the

relationship to be? What documents exist that prove that both Parties understood clearly

what the arrangement was to be and clearly expressed a wish that this be an Independent

Contractor relationship? I use a ‘Memorandum of Understanding’ that addresses all five of

the ‘tests’. Be aware that the ERA/EC/IRD will overlook documentary evidence in favour of

the ‘reality’ of the situation. So just because you both agree, doesn’t mean the tests are

satisfied.


2. Control test:

How much ‘control’ does the business owner have over the work the individual does? Does

the owner direct when and how things are to be done?

If there is a high element of control, this indicates ‘employee’.


3. Independence test:

To what degree is the individual free to choose how they want to do the job – do they

determine the methods and processes without much involvement from the owner? Do they

just arrive at work and get on with it? Can they decide not to work today? Can they send

another person along to do the work for them? Can they leave one business at 2pm and go

to another business for the rest of the day? A high level of independence indicates

‘Independent Contractor’.


4. Fundamentals test:

Is the individual clearly in business for themselves – do they advertise their services, do they

have other businesses that they provide service to? Do they get income from several

businesses (i.e. a contractor) or just one (an employee). Do they have an investment in

significant capital equipment – like a logging truck – or is their only tool a lap-top? In the

event of a mistake requiring re-work, do they have to fix it at their cost (i.e. contractor)?

Are they performing a set of tasks commonly done by employees in the business? If so, why

is this individual a Contractor?


5. Integration test:

How does this individual ‘fit’ into the business? ‘tightly integrated’ means that they are

doing work that is highly important, or a key role, where their sudden absence would be a

problem. If they decided to stop providing their services, what would happen? If the

business came to a halt, then they are tightly integrated and more likely an employee.


So what happens if you get it wrong?

Well, both parties may suffer from a mistake:

In the event of trouble, the business owner may suddenly find that either the EC, the ERA or

the IRD have determined them to be an ‘employer’ and the Independent Contractor to be

an ‘employee’. This is where the ‘fun’ starts. For example:

An Independent Contractor you decided to just stop using, goes to a lawyer who puts up a

case that they were really an employee; this means they were eligible for many of the

benefits in the above list, including annual leave (calculated for however long they were

with you) and a fair disciplinary or performance management process – so you’ve now got a

Personal Grievance on your hands for ‘unjustified dismissal’ which might cost you a lot of

money in compensation for ‘hurt and humiliation’ and arrears of ‘wages’. The IRD also have

an interest in that PAYE should have been paid (for however long etc).

The complainant doesn’t have it all their way either – no doubt the Independent Contractor

has been claiming GST, and operating costs and expenses against income tax. That all has to be reversed. It really is a very messy business, and an expensive one for the business owner.


OK, so what does all this mean?

Just because someone says they are an Independent Contractor does not mean they are

one.


Just because you sign documents together saying they are an Independent Contractor does

not mean the relationship is that of an Independent Contractor, if the reality of the situation

fails the tests.


A person who starts as an Independent Contractor may, in reality and over time, become an

employee if their situation changes.


Summary:

Our employment law system in NZ – and Unions - want people to be employed, and in

‘proper jobs’, preferably full-time and permanent, with all the protection for the worker

that goes along with that. Left-leaning political parties influence law to achieve that.


Independent Contractors have very little protection in employment law. However, they are

free to work wherever, whenever and for whoever they like. For many this is the main

attraction, and they either don’t want or don’t need the protection of employment.


The ‘elephant in the room’ is the suspicion that business owners want to use Independent

Contractors so that they can avoid the responsibilities of being an employer. Unions see this

as exploitation of the worker. There have been test cases over the years against Courier

companies (for example), because although the drivers are supposedly Independent

Contractors and have to buy their own van, they then have to sign-write their vehicle in the

company’s colours and logo, work the hours the company directs, wear the company’s

branded uniform, are given specific geographical areas to operate in, and are not allowed to

carry parcels for any other company. How many ‘test fails’ can you see?


In 2018, Southern Taxis (Christchurch) had to pay $97,753.05 in arrears to its drivers who it

had treated as Independent Contractors when in fact they were employees.


Earlier this year (May 2020) Parcel Express fell foul of Chief Judge Christina Inglis who

determined that one of their ‘Independent Contractors’ was in fact an employee. Although

her judgment was limited to just that one person (not all Parcel Express drivers), it is

considered a landmark case and has probably opened the door for other actions.


LSG SkyChefs were using a labour hire company which in turn used workers who they

considered Independent Contractors. It went right up to the Court of Appeal, who

determined that the contractors were in fact employees of LSG SkyChefs. For those

businesses using labour hire companies, watch out for test cases of the new Triangular

Relationships Act.


In the UK they have already moved to create a classification of ‘Dependent Contractor’

which gives those individuals almost all of the rights and entitlements of employees. Our

Labour Government has recently expressed interest in doing something similar.

So. If you’re thinking of engaging an Independent Contractor in your business, rather than

an employee, have a good think about why you are doing that. If it’s for flexibility, or short

term, or intermittent use, or for a specific project, then go ahead.


It’s important that you ‘get it right’ because the consequences of a mistake can be very

expensive, time consuming and stressful!

Article supplied by Steve Punter; owner of The People Effect Ltd based in Taupo, operating locally and around NZ and the Pacific Islands. He’s a Human Resources and Employment Relations specialist with 30 years in the profession. Check out www.thepeopleeffect.co.nz


Disclaimer:

Steve Punter is a Human Resources and Employment Relations practitioner, Advocate and educator, not a lawyer. All the above is provided for educational purposes and is not intended as legal advice. For a specific legal opinion, consult an employment lawyer.


Other sources for your own reading:

Employment Relations Act 2000 (section 6- Meaning of Employee)

http://www.legislation.govt.nz/act/public/2000/0024/latest/DLM58619.html

https://www.ird.govt.nz/about-us/videos/seminars/employers-workshop/who-is-an-employer

https://www.ird.govt.nz/roles/employees/self-employed-or-employee

https://www.employment.govt.nz/starting-employment/who-is-an-employee/difference-between-a-self-employed-contractor-and-an-employee/

https://www.employment.govt.nz/about/employment-law/employment-relations-triangular-employment-amendment-act/


© 2018 by Enterprise Great Lake Taupo

In Person

Level One

32 Roberts Street

Taupo

Over the Phone

(021) 1321475