Supreme Court rules on employee-contractor distinction

Anthony Drake, Senior Associate | June 2005

The first employment law decision by the Supreme Court has clarified the approach to determining the distinction between an independent contractor and an employee.

In Bryson v Three Foot Six [2005] NZSC 34, Mr Bryson, a model maker for Three Foot Six (involved in The Lord of the Rings production), was held to be an employee. 

In the various hearings that led to the Supreme Court decision, Mr Bryson had been held to be an independent contractor (by the Employment Relations Authority), then an employee (by the Employment Court) and then an independent contractor again (by the Court of Appeal) – highlighting the difficulties in distinguishing the real nature of the relationship. 

A key issue before the Supreme Court was the emphasis that should be given to industry practice. 

Industry practice – one size does not fit all

It was accepted that many workers in the film industry are hired as independent contractors.  The film industry was, therefore, understandably concerned about the implications of this decision, as were other industries who commonly engage independent contractors for convenience or commercial needs.

The Supreme Court decision confirms that employers cannot point only to industry practice to justify engaging someone as a contractor rather than an employee.

Put another way, industry practice is not conclusive in establishing the intention of the parties and will not override the specific relationship and the way it operates.

This does not, however, mean that it is the end of the road for all independent contractors in the film industry or elsewhere.  Industry practice was still considered a relevant factor. 

However, when engaging a contractor, businesses must reflect on whether the reasons behind an industry practice are relevant to each particular engagement. 

If there are particular business reasons why an industry commonly hires contractors, the company should consider whether those business needs are relevant to that particular engagement, ensure that is communicated at the outset, and that both parties conduct themselves in a manner consistent with a contractor relationship.  

Supreme Court decision

The Supreme Court concluded that the Employment Court had considered industry practice, and, therefore, Three Foot Six's appeal to the Court of Appeal was not based on any error of law.

The Court of Appeal did not, therefore, have jurisdiction to hear the appeal and the Employment Court’s decision was restored. 

For Mr Bryson, this means he was an employee who can now pursue a personal grievance.

For employers and contractors seeking guidance from this case, this means the reasoning of the Employment Court should be considered when assessing their own independent contractor relationships.

What does this mean for businesses?

Most employers and businesses are well aware that the question of whether a worker is an employee or an independent contractor can be answered by examining the "real nature" of the relationship. 

In considering the nature of the relationship, the courts will look at all relevant matters, including the written and oral terms between the parties, indications of their common intention and the way in which the relationship has operated in practice. 

The contract…

It remains important to get the written contract right.  The contract – and the extent to which it reflects the intention of the parties - is always likely to be taken into account. 

The important lesson is, however, that the contract is but one relevant matter.

An employer should not rely on the fact that both parties have signed a contract describing the relationship as a  contractor arrangement. 

The terms of the contract and the nature of the relationship should be properly expressed, including the intention of the parties. 

…But not only the contract

A key theme from the Bryson decision is that the contract, and any statements by the parties that describe the nature of their relationship, are not determinative.

The practice of the parties throughout the term of the contract will be an important factor in deciding whether the employment relationship has truly been that of an independent contractor.

Although this will always be a fact-specific question, the following questions may help assess the real nature of the relationship:

• how much do I control the contractor - is it similar to how I do or would control an employee?
• is the contractor in business on his or her own account?
• does the contractor only work for me – or does he or she contract with a number of organisations?
• how independent is the contractor?
• would it look like the contractor is a part of the organisation?
• does the contractor supply their own equipment or tools?
• where and when is the work carried out?
• does the type of business justify hiring a contractor?

Again, these questions – and others which are relevant to determining the real nature of the relationship - must be addressed throughout the term of the contract.  This is particularly important if the conduct of the parties changes over time. 

Don't forget the tax

Being classified as an employee rather than an independent contractor radically alters the tax obligations of both the employer and the employee. 

Contractors generally handle their own tax payments, deducting business expenses, registering for GST and paying their own ACC contributions. 

Employees have tax deducted by the employer (PAYE) and are not eligible to be GST registered or deduct expenses against their employment income. 

Where parties have proceeded on the basis that an independent contractor relationship exists, a decision (either through the Employment Relations Authority or the Employment Court) or other settlement would lead to a reassessment of both the employee’s and the employer's tax liabilities and payments to date.

Where to from here?

Businesses should use this decision as an opportunity to undertake a "review" of their independent contractor relationships.

Approach this review on a case-by-case basis – questioning the facts of each contractor relationship to assess its real nature.

If a business considers there is a risk that its independent contractor arrangements may be considered employee relationships, there may be a number of options available to it.

Each case needs to be assessed on its own merits and if you are in doubt then you may need to obtain specific advice.

For further information, please contact your usual Bell Gully adviser or:

Auckland

Rob Towner
Partner

Wellington

Andrew Scott-Howman
Partner