Independent contractors: critical questions for employers

Rob Towner, Partner | Thursday 23 November 2006

There has always been a very fine distinction between a contract "for" service (independent contractor) and a contract "of" service (employment).

The Employment Relations Act 2000 (ERA) confirmed the Labour Government's view that independent contractor arrangements were not to be used to circumvent the basic protections afforded under New Zealand's employment legislation.

Unfortunately, rather than providing clarity to the curly issue of when a contractor is not a contractor, the ERA and the resulting case law has simply reinforced that in some cases it is nigh on impossible to accurately assess "the true nature of a relationship".

"Real nature of the relationship"

Although deciding the real nature of the relationship can be difficult, the ERA does provide some guidance. Section 6 providing:

• "(2) In deciding ... 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 sub section (2), the Court or the Authority –
  
  
  • must consider all relevant matters, including any matters that indicate the intention of the persons; and
    
    
  • is not to treat as a determining matter any statement by the persons that describes the nature of their relationship."

The fact that a contract between the parties, declaring the person to be a contractor, is no longer conclusive can lead to the need to assess and weigh a range of different factors – and therefore uncertainty!

The complex legal and factual issues involved are reflected in the Supreme Court's first foray into employment law - involving section 6. Mr Bryson's long running saga with Three Foot Six Limited over his position as a model maker during the production of the Lord of the Rings trilogy has been well documented.

While the Three Foot Six matter has been mainly concerned with esoteric and complicated legal issues, a recent case brings home the dangers or risks involved in using dependent contractors.

Semmens v SDP Call Centres Limited

Judith RakuRaku provided services to SDP Call Centres Limited for four years.

Her job, as a telephone operator-telemarketer, was to cold call members of the public to seek donations for charitable organisations. She was never offered a contract of employment nor was she offered an independent contractor agreement. Rather, in her interview with the owner of the company, Arthur Sandford, she was simply told that her earnings would be entirely commission-based and that she was responsible for her own ACC levies.

Ms RakuRaku worked regular shift patterns and was paid 20% of donations she managed to extract from the public. She did not invoice the company, but received payments automatically twice a month.

Ms RakuRaku's knight in shining armour was Robin Semmens, a Labour inspector who, brought a large arrears of wages claim on her behalf. Attempts to mediate the matter were unsuccessful, and, as a result, the Employment Authority investigated the issues. The company did not attend the Authority, citing Mr Sandford's poor health and the precarious financial position of the company as its reasons for non-attendance.

However, the Authority was not prepared to delay the matter and investigated without the company's participation.

In a very useful decision, Authority member Dennis Asher sets out exactly what the Authority is required to do in situations such as these and how they should go about it.

The Authority referred to section 6 of the ERA and then examined:

• the nature and form of any contractual document;
  
  
• any "control" exercised by either party to the relationship;
  
  
• whether the contractor/employee is integrated into the business;
  
  
• the fundamental or economic reality of the situation;
  
  
• arrangements in relation to taxation; and
  
  
• industry practice and contractual intention.

Mr Asher then embarked on a form of balancing exercise taking each "factor" into account. Here, in reality the situation was relatively straightforward and one doubts that the Authority's finding was even remotely controversial. Quite clearly, Mr Sandford exercised large degrees of control over Ms RakuRaku's actions, including dictating when she was to take her holidays and when she was required to work. Ms RakuRaku did not invoice the company for payment nor was there any evidence that she was a person in business on her own account.

Remedies

While this was an unusually straightforward case, the majority of the time the situation is much less clear. While the approach of many businesses may be "she'll be right" and to just accept the risks, the remedies awarded to Ms RakuRaku may prompt even the most ardent business owner to review any contractor arrangements they have in place. For the record, Ms RakuRaku was awarded:

• minimum wages owing of $30,422;
  
  
• public holidays owing of $3,264; and
  
  
• annual holidays owing of $5,461.

Had Ms RakuRaku also filed a personal grievance claim, there is little doubt that she would have been awarded compensation on top of these sums.

What to look for

In the vast majority of instances, the true status of a relationship only becomes an issue when a company wishes to terminate the relationship with a contractor. In New Zealand, an employer can only terminate an employment relationship for cause. In contrast, independent contractor arrangements usually contain simple termination on notice provisions. The major risk is that after termination a "contractor" will challenge their status and, if successful, bring a grievance for unjustified dismissal.

So, what will the courts look at, or, more importantly, what should you, as a business owner, be reviewing to ensure that your risks are minimised? We suggest you examine:

• How much control do you exercise over the contractor? If the contractor is free to provide services for other parties or is free to perform their duties as and when they desire then this would suggest a true contractor relationship.
  
  
• How is the contractor paid? Does the contractor invoice you for services rendered; is the money paid through a company; does the contractor take care of ACC levies and income tax obligations?
  
  
• Is the contractor required to provide insurance? If the contractor's activities are simply covered by the company's general insurance policies then this may suggest that the contractor is in fact fully integrated into the business.
  
  
• Does the contractor have a business card? While this may seem like a small thing, the courts have used business cards as being reflective of how the business relationship is portrayed to third parties.
  
  
• Where does the employer perform their duties? If the contractor sits alongside employees in the company's offices doing the exact same work as other employees, then this would suggest the true nature of the relationship is employment. It is a good idea to ensure that payments to contractors are adjusted for such things as use of office space or equipment.
  
  
• Is there any documentation recording the nature of the relationship and dealing with any of the above issues?

It is no understatement to say that it is inherently difficult to assess the true status without an intimate understanding of the mechanics of a particular relationship. It is also a fact that sometimes the major difficulty is proving the true nature of the relationship – what may have seemed clear when the relationship began may have been muddied somewhat as the relationship has developed.

Complicating matters further is the fact that often it is the individual's choice to be a contractor. However, what the company must understand is that the company carries all the risk. While relations may be rosy now, it is a fact of life that often working relationships end in acrimony. Clearly defined parameters to a relationship provide certainty and protection. Turning a blind eye will often simply lead to trouble.

A crucial question

Although the issues can be complex, the basic question is: "is this person in business for themselves?" If the answer is no, you might want to consider the extent of any risk to your business, and whether the true situation is actually one of employment. If you are in any doubt about the true nature of the relationship you have with any of your contractors, then we suggest seeking specialist legal advice.

 

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

AUCKLAND

Rob Towner
Partner

WELLINGTON

Andrew Scott-Howman
Partner

Matt McGoldrick
Solicitor