Employee or Independent Contractor?

Andrew Scott-Howman, Partner | December 2001

Considers a recent decision of the Employment Court and contrasts the "real nature" test with the approach taken in a recent decision of the High Court of Australia

It is often said that any task that can be performed by an employee in the context of an employment relationship can also be performed by a contractor pursuant to the terms of an independent contractor arrangement. Discerning the difference between such arrangements - and providing a test for general application - has provided courts for many years with "vexing" questions.

The introduction of a provision in the Employment Relations Act to address this issue brought with it conjecture that a new approach might be developed in New Zealand to enable a distinction to be drawn between employees and independent contractors. A recent decision of the Employment Court appears to evidence a new approach, although an analysis involving the previous approach taken in this country suggests that the new may not be entirely different to the old. Further, a consideration of a recent decision of the Australian High Court might also suggest the need for some caution in the application of New Zealand's developing approach.

The position under the Employment Contracts Act

The Employment Contracts Act 1991 was, as its title suggested, primarily intended to apply to the regulation of employment contracts. An "employment contract" was defined briefly to include a contract of service (and also a contract for services between an employer and a homeworker). The Act did not provide any guidance as to the way in which any particular contract (or relationship) should be considered in order to determine whether or not it fell within the bounds of this broad definition.

The position was clarified by the judgment of the Court of Appeal in Cunningham v TNT Express Worldwide (New Zealand) Ltd [1993] 1 ERNZ 695 - a case which involved a consideration of the circumstances applying to a person who had been retained to provide services as an "owner/driver courier" (by the terms of the parties' written arrangement ostensibly as an independent contractor).

The Court took the approach that its task was to determine the true nature of the relationship by endeavouring to ascertain the intention of the parties to the arrangement. In doing so, the Court looked to evidence which established the parties' intention at the outset of the relationship. The Court held that where the parties had entered into a written contract at the outset of their arrangement the case would turn upon "the true interpretation and effect of the written terms".

In this way, the Court held that paramouncy should be given to the consideration of a written document recording the parties' intentions. This consideration was not, however, absolute: where there was a suggestion that the written document was a sham, or that over the course of time the true nature of the parties' relationship had varied, the Court could turn to consider the surrounding circumstances and features of the arrangement in practice in an effort to establish the parties' true intentions.

The application of this approach to Mr Cunningham's circumstances allowed a simple conclusion : the written arrangement between the parties had plainly contemplated an independent contractor arrangement and, in the absence of any suggestion of a sham or of changed circumstances, this contract was regarded as accurately evidencing the parties' intentions.

In several of the judgments making up the Court's decision, reference was made to an article written by Mr Hugh Collins entitled "Independent Contractors and the Challenge of Vertical Disintegration to Employment Protection Laws" (1990) 10 Oxford Journal of Legal Studies 352. The general thesis of Mr Collins' work was to sound a caution to Courts against allowing organisations acquiring labour to deny employment protection rights by structuring their relationships in a particular way. He suggested that the disproportionate power relationship between those who provide labour and those who seek to retain it might result in social subordination - and denial of what Mr Collins viewed as fundamental rights. He argued that the application of tests to determine presumed intention denied the clear purpose of labour law regulation - which he said was to protect the rights of those providing their labour for the benefit of others. Mr Collins argued for the development of a presumption that every relationship should be an employment relationship unless it could be demonstrated that it was a "task performance contract" and that no "badges of membership" of the employer organisation applied.

Cooke P (as he then was) observed that Mr Collins' thesis might not necessarily coincide with the purpose of the New Zealand legislature in enacting labour law regulation in this country. Put another way, it could be said that the approach taken by the President was to accord some significance to a legitimate desire to allow parties to regulate their own commercial relationships (in a way consistent with New Zealand's employment law).

The approach enunciated in Cunningham brought with it the prospect of a degree of certainty for contracting parties: provided that their actions did not cause the suggestion to be made that they had acted to feign an independent arrangement, by carefully recording the terms of their relationship in writing they were able effectively to evidence a mutual intention to avoid an employment relationship - and in doing so, to avoid the prospect of a tribunal later denying their intention by concluding that their arrangement was, in fact, of a different character.

The approach was not, however, without its downside. Because of the emphasis upon the terms of written documentation the position was necessarily more complicated where the parties' arrangement was not recorded in writing. In that case (as evidenced by the approach taken by the Employment Court in Muollo v Rotaru [1995] 2 ERNZ 414) the Court would turn to examine relevant features of the parties' conduct. This approach was built upon a rationale that if the outward features of an arrangement matched those which were expected to be observed in one or other type of relationship, it could be presumed that the parties had intended theirs to be that type of relationship.

In undertaking this examination, the Court (or Tribunal) would, amongst other things, consider custom and practice in a particular industry. In addition, it would habitually apply one or more of the following "tests" to elicit the parties' presumed intention:

• the "control test" - which involved an analysis of the degree of control exercised by the putative employer over the work performed;

• the "integration test" - which required an analysis of the degree of independence from the putative employer;

• the "fundamental test" - which required an analysis of a similar question as to whether the person providing services performed them as a person in business on his or her own account;

• the "intention test" - which embraced a proposition that if the true legal relationship according to actual intention was one of employer and employee, this relationship could not be denied by subsequent actions;

• the "multiple test" (which is also variously referred to as the "overall test" and the "mixed test") - which involved the integration of two or more of the above tests.

Irrespective of the particular test (or tests) actually applied, this approach necessarily involved a weighing of different features evidenced by individual circumstances. Commonly, arrangements disclosed some features consistent with each of the different types of relationship and, as a result, a determination about which was to be preferred as an appropriate characterisation could not be accurately predicted.

A new approach

Section 6 of the Employment Relations Act 2000 provides a definition of "employee". Subsections (2) and (3) provide assistance to a tribunal charged with establishing whether a person falls within this definition in the following way:

2. In deciding for the purposes of subsection (1)(a) whether a person is employed by another person under a contract of service, the Court or the Authority (as the case may be) must determine the real nature of the relationship between them.

3. For the purposes of subsection (2), the Court or the Authority-

   1. must consider all relevant matters, including any matters that indicate the intention of the persons; and

   2. is not to treat as a determining matter any statement by the persons that describes the nature of their relationship.

A number of the early decisions of the Employment Relations Authority reflected the adoption of a new approach in light of this legislative change. Several of these decisions involved the Authority in the application of one or more of the tests of presumed intention in determining the "real nature of the relationship". The matter has now, however, been the subject of consideration by the Full Court of the Employment Court in Koia v Carlyon Holdings Limited (Unreported, Employment Court, Auckland, 20 August 2001).

Mr Koia had purchased a business which was described as a "distributorship", by which he acquired the right to deliver and on-sell certain products to supermarkets and dairies. He had entered into an agreement which provided that he was required to purchase the products from the respondent company and to on-sell them at prices no less than wholesale levels prescribed by the company. Mr Koia was required to maintain his own delivery vehicle and uniform but was otherwise largely allowed to manage his business on his own account. The written agreement between the parties denied the existence of an employment relationship.

At first instance the Employment Relations Authority found that although the evidence disclosed some element of control by the company the outward features of the arrangement did not contraindicate the existence of a principal and contractor relationship.

In delivering the decision of the Employment Court on the appeal, Judge Travis analysed the implication of the introduction of section 6 of the Employment Relations Act. He regarded the provision as establishing that the parties' intention is no longer decisive as a consideration in the Court's analysis. He characterised the task for the Court in the following way:

"… it must always be a question whether the arrangement that the parties have made is more consistent with a contract of service than with a contract for services."

In other words, His Honour regarded the practical effect of section 6 as requiring the Court to indulge in an observation of the outward features of a relationship and to consider whether those features were more consistent with the recognised incidents of either an employment relationship or an independent contract arrangement. Judge Travis indicated that the Court would be slow to overrule the intention of the parties, but that "it is now again more concerned with substance than with form".

In the event, the Court applied what it described as the "real nature" test - which does not appear to have involved any express application of any of the labelled tests of presumed intention outlined above. The Court found that the accepted intention of the parties was to enter into an independent contractor arrangement and that, weighing all of the features of the relationship, while there were aspects of the relationship that favoured one or other characterisation, the fact of the purchase of the distributorship was strongly persuasive in leading to the conclusion that the parties had entered into an independent contractor arrangement.

The effect of the "real nature" test is to require the Court (or the Authority) to embark upon an exercise involving the weighing of various of the outward features of a particular arrangement. It is, in this way, not entirely dissimilar to the steps taken under the Cunningham approach in the absence of a document evidencing written intention. It is apparent, however, that the "real nature" test has a different motive : rather than seeking to elicit the intention of parties the test appears to concern itself with an analysis of substance, with the objective of determining the characterisation with which the outward features of a relationship can be said to be more consistent.

An Australian approach

Less than two weeks prior to the issue of the decision of the Employment Court in Koia, the High Court of Australia had handed down its decision in Hollis v Vabu Pty Ltd (t/as Crisis Couriers) (2001) 181 ALR 263.

The question facing the Court was similar in that it was required it to consider a certain arrangement to determine whether, as a matter of fact, its circumstances disclosed an employment relationship or an independent contractor relationship. The Court was required to consider this question as a matter of general principal (as opposed to receiving guidance from any applicable employment legislation). The matter was, however, different to that which would ordinarily confront a New Zealand Court (or the Authority) in that the case concerned a question relating to liability for personal injury.

The Hollis case had its origins in an unfortunate accident which occurred in December 1994. A bicycle courier had, in the course of delivering a particular package, knocked over a pedestrian in the street. The pedestrian was injured and sought to bring personal injury proceedings against the company whose name had been emblazoned upon the jacket worn by the courier. The company maintained that its couriers were independent contractors and that, as a result, the principle of vicarious liability did not apply to allow the injured pedestrian to proceed against it for damages.

The matter was compounded by the fact that a question involving the employment status of the company's couriers had been considered in 1996 by the New South Wales Court of Appeal in the context of a superannuation issue. The Court had been asked to decide whether the couriers were employees, such as to oblige the company to make certain required superannuation deductions from the amounts paid to them. In that case the Court held that the couriers were independent contractors.

In both the decision of first instance, and on the first appeal, the Courts considering the personal injury claim had followed the reasoning of the Court of Appeal in the superannuation decision, and had concluded that the couriers were independent contractors. It was in this context that the matter came before the High Court.

The majority of the High Court found that vicarious liability was, by its nature, consistent with the employment relationship, and that ordinarily vicarious liability should not be imposed upon a principal in an independent contractor arrangement. It analysed the relationship between the courier and the company both by giving careful consideration to the terms of the written document between the parties (which ostensibly provided that the relationship was an independent contractor arrangement) and by examining all of the features of the relationship evidenced in the parties' work practices. Having concluded this exercise, the majority of the Court held that the couriers were employees, and allowed the imposition of vicarious liability for the benefit of the injured pedestrian.

Justice McHugh disagreed with the decision of the majority and provided a dissenting judgment. In his opinion, the case illustrated the difficulty faced by the Courts in applying traditional rules of liability for negligence to new and evolving employment practices. He concurred with the majority that certain aspects of the arrangement were consistent with an employment relationship. He noted, however, that there were other features (which were admitted by the majority) that were not necessarily consistent with such a relationship. Rather than apply what he described as a " 'dichotomy' based on medieval concepts of servitude", His Honour chose to examine the facts of the case by analysing the development of vicarious liability. He opined that development of the law should not impact upon the settled expectations of employers and those with whom they contract for the provision of labour services. Further, he suggested that it might be unjust to impose upon parties a relationship which was fair for a particular purpose (such as the imposition of vicarious liability in this case) but unfair in the consequential imposition of other incidents (such as unexpected taxation and insurance consequences) - and, further, that to do so might even make one or both of the contracting parties retrospectively guilty of certain statutory offences. He held that, for reasons of policy, the independent contractor arrangement between the company and its couriers should be allowed to stand but that for the purposes of the injured pedestrian's claim, it was both fair and effective to allow the imposition of liability upon the company.

Conclusion

The "real nature" approach espoused by the Employment Court in Koia does represent a departure from the Cunningham approach in that an intention embodied in a written document between parties is no longer to be accorded paramount status in determining the true nature of the parties' relationship, and in that a weighing of outward factors will now occur in every case (and not solely where there is a suggestion of sham, or where there is no written agreement). It also differs in that the objective of the approach appears to be unconcerned with ascertaining the parties' intentions, and directed rather at weighing outward factors in an effort to establish the type of relationship with which the arrangement could be said to appear "more consistent".

The approach is not, however, entirely different from that laid down in Cunningham (and it could be said also to be broadly consistent with the approach taken by the majority of the High Court of Australia in Hollis). Whilst no longer paramount, statements of written intention are still relevant in considering the "real nature" of an arrangement - and, where genuinely given effect, it is said that the Court or Authority will be slow to act to defeat an intended arrangement. Further, the "real nature" weighing exercise is not altogether different from the broad approach taken in the application of any one of the tests of presumed intention - and the same observation could be made that, by its nature, the weighing exercise introduces an element of uncertainty of outcome for contracting parties.

Perhaps if the decision of the Employment Court in Koia is to be criticised, it would be on the basis of the prospect of possible inequity of the type identified in the dissenting judgment of McHugh J in the Hollis case. One of the key considerations in the development of the Cunningham approach was a desire to protect the parties' legitimate intentions (where it was just to do so). In other words, the approach recognised the parties' ability to regulate their own commercial arrangements (subject to certain restrictions). According to Cooke P, an approach which required the Court to exercise the protective role advocated by Mr Collins in his article was contrary to the legislative policy in New Zealand.

One might question, however, whether the approach taken by the Employment Court in Koia represents a rejection of that approach (and, to some extent a championing of Mr Collins' thesis). The application of the "real nature" test may result in outcomes contrary to contracting parties' mutual intentions. Parties may choose to regulate their commercial relationship in a particular way - for reasons including taxation considerations or for the appropriate apportionment of liability. If, however, it is later said that a weighing of all of the outward features of their relationship results in a conclusion that the arrangement is "more consistent" with a different relationship, then the Court shall impose all of the incidents of that different relationship upon them. This is, of course, the prospect which provided McHugh J with the impetus to enunciate his dissent in the Hollis case.

There may be an additional consideration concerning retrospectivity. Because of the different outcomes possible as a result of application of the Koia approach, it is possible that parties whose relationship would have been regarded as an independent contractor arrangement prior to the introduction of the Employment Relations Act will now be regarded as being in an employment relationship. There may be arguments that it is unjust for a party knowingly to take the benefit of an independent contractor arrangement through the course of a relationship, but (in the manner sought to be pursued by Mr Koia) to deny the intended nature of that relationship at its conclusion in order to pursue remedies under the employment legislation. Equally, however, it could be said that the application of this approach will achieve just ends by exposing arrangements for what they are in substance - and that any inequity of the type outlined is simply a consequence of (at least to some extent) a sham arrangement.

Participants in the New Zealand labour market will now wait to see whether the "real nature" approach will result in the removal of certainty by producing different outcomes to those that might have been expected previously.