The "Real Nature of the Relationship": Employee or Contractor?

The Employment Team | July 2001

Four recent decisions of the Employment Relations Authority provide some guidance as to the test which will now be applied to distinguish between employees and independent contractors.

Introduction

As most employers are aware, the distinction between employees and independent contractors is fundamental: the Employment Relations Act (ERA) only applies to employees and has no application to independent contractors. That fact may, in itself, incline some employers and workers to attempt to structure their relationship to avoid the characteristics of an employment relationship.

Former Regime

Under the former employment contracts regime, considerable weight was placed upon agreed contractual terms in determining the nature of the parties' relationship. This meant that a statement of mutual intent was often determinative of the issue.

New Approach

Recent decisions of the Authority indicate departure from this approach. It is now apparent that the Authority will consider three factors in determining, under section 6 of the ERA, the real nature of the relationship" between parties:

• Any statement of intent as to the nature of the relationship contained in a written document - this will be given some weight but will not be solely determinative of the issue.
  
  
• The level of control exercised by one party over the other. Broadly, the greater the level of control exercised, the more likely it is that the arrangement is an employment relationship.
  
  
• The degree to which the worker is actually in business for him or herself.

In considering this factor, the Authority will take into account whether the worker is responsible for providing the necessary equipment, for hiring staff, and importantly, whether he or she has adopted a degree of financial risk. The greater the level of individual responsibility, the more likely a conclusion that the arrangement is independent.

Consequences of New Approach

This new approach indicates that all aspects of a relationship will be considered in order to determine the real nature of the relationship. There are a number of important consequences of this.

First, it may be more difficult for parties to structure an independent arrangement (perhaps for tax purposes) where the degree of control and independence is more reflective of an employment relationship.

Secondly, a party seeking to disprove the existence of an employment relationship will be required to bring significantly more evidence to establish its case as the Authority will consider evidence concerning all aspects of the relationship.

Thirdly, difficult questions may arise where the nature of a relationship necessitates a reasonably high degree of control by one party, yet the relationship is intended to be independent.

An example of such an arrangement is that between franchisor and franchisee. In this type of relationship there is typically a high degree of control by one party over another yet it is mutually intended that the franchisee will accept business risk and independently pursue his or her own interests.

There is at least some comfort that the Authority is aware of such issues. One of the Authority's relevant decisions concerned an arrangement between a taxi company and a driver who had paid for the right to use the company's livery and its operational support. In that case, the Authority recognised that although the level of control exercised by the company was high, the true nature of the relationship was independent.

Summary

Recent decisions of the Employment Relations Authority indicate that a more comprehensive test will be used to determine whether a particular arrangement is an employment relationship or an independent contract. Parties who seek to ensure that their relationship is of one nature or the other would be well advised to seek legal advice - either before establishing their relationship or in the event that there is any doubt about its true nature.