Employee or Contractor?

Andrew Scott-Howman, Partner | December 2001

Employee or independent contractor? It's a question that has challenged employment courts and tribunals for years.

Earlier this year we examined the decision of the Employment Relations Authority in the Koia case. The Authority was asked to consider the application of a new test under the ERA to determine whether a particular person is an employee or an independent contractor. The case has now been the subject of a decision on appeal to the full Court of the Employment Court. The decision provides authoritative and detailed guidance on the test's application.

The case required a careful consideration of section 6 of the ERA. That section prescribes the "real nature" test to determine whether the relationship is employee or independent contractor. Section 6 requires a consideration of all relevant matters - no one statement describing the nature of a relationship should be regarded as determinative.

This is a departure from the approach under the old Employment Contracts Act as spelt out in the Cunningham decision where the terms of the written contract were paramount. Employers used to be able to ensure relative certainty in their commercial arrangements - the courts largely gave effect to any written intention recorded in the contract.

Now, with the Koia decision, the court has signalled a new direction. The "real nature" test considers all outward features of a relationship and asks whether they are "more consistent" with an employment relationship or an independent contractor arrangement.

In essence, the Court (or Authority) must now weigh all of the circumstances of an arrangement - only one of which will be the parties' stated intention about the nature of their relationship.

Mr Koia had argued that the cancellation of an agreement was an unjustified dismissal from an employment relationship. But applying its new approach, the Court found that the accepted intention of the parties was to enter into an independent contractor arrangement.

Mr Koia had purchased a business which was described as a "distributorship" of certain goods. He entered into a contract (which was described as an independent contract) and was obliged to purchase these goods from a supplier for resale. Mr Koia had to wear a uniform, paint his car in the supplier's get up and resell the goods at no less than a minimum price which it prescribed.

"The 'real nature' test considers all outward features of a relationship and asks whether they are 'more consistent' with an employment relationship or an independent contractor arrangement."

Mr Koia had some independence in determining customers that he approached, and the price which he set above the supplier's prescribed minimum. He was also permitted to conduct other businesses (including the resale of other products), although he did not actually do so.

The purchase of the distributorship persuaded the court that the parties had in fact entered into an independent contractor arrangement.

The new approach while helpful will not be without certain difficulties.

It is common for arrangements to embody certain features of an employment relationship and other features of an independent contractor arrangement (which was the case with Mr Koia). It is possible that contracting parties may genuinely intend their relationship to be an independent contract and conduct their relationship on this mutual understanding. However if the relationship sours and a number of features of the relationship are "more consistent" with employment a party could use this to their advantage before the Employment Court. It may be difficult to discern the true nature of any relationship with accuracy.

Secondly, the new approach may result in some retrospective application. Relationships which were entered into as independent contracts under the Employment Contracts regime (and which would have been confirmed as such under the Cunningham approach) may now be regarded as employment relationships upon the application of the Koia approach.

Parties to independent contractor arrangements should be aware of the need to ensure that all aspects of their relationship are consistent with an independent contract. This means that, in addition to the written agreement, their behaviour throughout the relationship should match their stated intention.