In summary, these changes would involve an amendment to the current legislation to state that if a worker satisfies four criteria (described as a “gateway test”), they will be a contractor at law, and will not be able to challenge that legal status. Workers who do not meet the gateway test will continue to be able to bring a legal challenge asserting that they should be re-classified as an employee, not a contractor.
Legislative reform regarding contractor status was included in the ACT-National coalition agreement. This agreement stated that the Government would “maintain the status quo that contractors who have explicitly signed up for a contracting arrangement can’t challenge their employment status in the Employment Court”. Read our earlier article here for further details regarding other proposed employment related reforms. Taking Cabinet decisions on legislative amendments to clarify the employment status of contractors is part of the Coalition Government’s Q3 Action Plan.
On the current state of the law, Workplace Relations and Safety Minister Brooke van Velden said that “The current process for workers challenging their employment status through the courts can be costly for businesses, and can increase business uncertainty in general”. The Government’s main aim in amending the law in this area is therefore to provide more certainty to businesses about whether a worker is a contractor or an employee.
Further details about the proposed changes
On 15 September 2024, the Government set out further details about how it intends to provide clarity about whether a worker is a contractor or an employee. In short, the Government is proposing an amendment to the Employment Relations Act 2000 (ERA) to provide that if a worker meets the following four criteria, they will be a contractor at law:
- a written agreement with the worker, specifying they are an independent contractor;
- the business does not restrict the worker from working for another business (including competitors);
- the business does not require the worker to be available to work on specific times of day or days, or for a minimum number of hours OR the worker can subcontract the work; and
- the business does not terminate the contract if the worker does not accept an additional task or engagement, (Contractor Criteria).
If a worker satisfies the Contractor Criteria, they will not be able to challenge their legal status as a contractor through the courts. However, if the Contractor Criteria are not met, then the existing test in the legislation will apply, meaning that these workers can continue to challenge their legal status by alleging that they are, in fact, an employee, and not a contractor.
The “existing” employment status test
If a worker does not meet each of the Contractor Criteria, the “existing” test under the ERA would apply. The “existing” test is set out in section 6 of the ERA, which sets out the meaning of “employee” (Section 6 Test). In accordance with the Section 6 Test, the Employment Relations Authority (Authority) / Employment Court is required to determine “the real nature of the relationship” between the alleged employee and the alleged employer. The Authority / Employment Court must consider “all relevant matters” and must not treat any statement by the parties describing the nature of the relationship as determinative. There will usually be a number of competing factors and no one factor is decisive. The legal tests applied when assessing employment status are:
- the parties’ intentions;
- the control exerted by the alleged employer over the alleged employee;
- the independence of the alleged employee;
- the fundamental “economic reality” of the arrangements; and
- the level of integration of the alleged employee within the alleged employer’s business.
If a worker has been incorrectly treated as a contractor but is found to be an employee “at law”, that worker is entitled to:
- access the personal grievance regime under the ERA (including the ability to challenge unfair disadvantages and dismissals);
- statutory minimum employment entitlements (such as the minimum wage, and paid holidays and leave under the Holidays Act 2003); and
- access other benefits available to employees during their employment (e.g., KiwiSaver, the right to bargain collectively etc).
Our views regarding the Contractor Criteria
While the high-level concepts have now been released, of lot of underlying detail is not yet known and will only become apparent once a draft Bill is introduced to Parliament. For example:
- To what extent will businesses be able to limit or restrict the application of the Contractor Criteria while still satisfying them. For example:
- Can a business require that it must first approve any sub-contractor before the contractor can sub-contract work?
- Can a business require a contractor to work a specified number of hours within a period of time (e.g. eight hours between 8am and 5pm)?
- Can a business indirectly restrict a worker from working for another business (including competitors), for example, through the use of conflict of interest, confidentiality or restraint provisions?
- How do the Contractor Criteria interact with (and what impact will they have on) other ways of engaging workers, including the use of casuals, part-time (variable hours) and fixed term employment, 90-day trial periods and triangular employment relationships?
- Whether a worker could still be deemed to be a contractor if they did not meet the Contractor Criteria or the Section 6 Test.
- What recourse a worker has if the contract meets the Contractor Criteria, but then a business terminates the contract after a worker fails to accept an additional task or engagement?
- Whether any of the proposed changes will apply to agreements entered into before the law comes into force.
- Whether, in order to rely on the Contractor Criteria, businesses will need to take additional steps, for example, to
- advise workers of their right to take legal advice before signing the contractor agreement; and
- provide workers with specific information about their legal status as a contractor and their inability to challenge that legal status if the Contractor Criteria are met. (Parallels might be drawn with the requirement for employment agreements containing 90-day trial period provisions to stipulate that they prevent the employee from legally challenging their dismissal (section 67A(2)(c) of the ERA)).
Watch this space
Clarity regarding contractor status will come as a relief to many businesses. However, as noted, we consider that there are still a number of details to be ironed out in order to mitigate the risk of creating further uncertainty. Once draft legislation is introduced to Parliament, it will need to work through the parliamentary process, which is likely to involve some robust debate and the opportunity for public submissions to a select committee.
If this amendment to the legislation is enacted, businesses will need to consider carefully how they set up workers going forward, as well as whether they want to reconfigure existing contractor relationships to bring them within the Contractor Criteria, and if so, how to go about that. Time will also tell if the publicity around these issues and law changes may result in further legal challenges, at least over the transition period, and to test the boundaries of any new law.
We will keep a watching brief on this proposed reform and will keep you updated.
If you have any questions regarding this potential change on the horizon, please get in touch with your usual Bell Gully advisor or a member of the Bell Gully Employment and Workplace Health and Safety Team.