Last year we gave a presentation to a client and their staff on the tests between being an Employee and an Independent Contractor. It is one of those arguments that come up from time to time, and we have to go back to basics every so often to remind us of the tests.
In March 2016 the Employment Relations Authority issued another determination on this issue: Hardy v Visionstream Pty Ltd  NZERA Auckland 97. Having just read the decision, it is clear that there remains a lot of confusion on the tests, and more particularly, confusion with individuals who enter into contractual relationships, which are not employee relationships, but where the individual clearly does understand the difference. So below is our attempt to make it as clear as possible.
The Intention Test
If both parties agree that the relationship is contractor and principal, then generally that position would not be overturned. However, often a relationship may commence in an adhoc manner, in which neither party was clear with the other what that relationship was. In others each party has a different view of the relationship but there is no written agreement (or exchange of correspondence) between them setting out the position.
The Control Test
How much control did the principal exercise over the person? Were hours and days stipulated, were they closely monitored, did the individual have to advise if they were not available, request leave etc?
The Integration Test
Is this work normally done by an employee, was the individual previously an employee of the principal, and if so what has changed?
Is the work ongoing, rather than a one-off?
Is the role integral to the principal’s business, does the individual appear to be an employee to others (e.g. do they have business cards representing their role with the company)?
The Independence Test
Does the individual have any skin in the game? Could they increase their return by being efficient, subcontracting or working smarter? Could they suffer a loss or liability, e.g. could they be liable for damages or be required to correct poorly performed work? How does the individual present their business to the public and the Inland Revenue?
Does the individual carry public and personal liability insurance, do they advertise their services, do they have their own equipment and offices?
Could the individual exercise discretion over how the task was performed, when it was performed, who performed it (e.g. could the individual engage someone else to perform the task), did the individual create a separate entity to carry out the work, can they work/engage with other parties, did they have skills and experience for the work or were they trained up by the principal?
The Industry Practice Test
For this type of work, is it normal for the individual to be an employee or a contractor?
The Fundamental Test
Also known as the “business test” or the “economic reality test”, this is essentially a combination of all of the tests with an overarching look at what is really going on:
- Whether the type of business or nature of the task justifies or requires independent contractors?
- Who is legally liable if the job goes wrong, who is responsible for correcting any mistakes?
- Can the contractor be dismissed (the problem with this test is that employment law cases often arise because they have been dismissed, triggering the dispute in the first place)?
- Whether there is a time limit on the contract, e.g. a specific project to be completed?
- What was the behaviour of the parties before and after entering the contract?
This one of the examples we use when discussing the difference between employees and independent contractors:
James Bond is an employee. Evidence:
- Can only work for the British Secret Service
- Doesn’t advertise his skills, nor seek out other work
- Has no office or employees, works out of the Secret Service offices
- M (who also works for the British Secret Service) assigns work to Bond, disciplines Bond at times, threatens to sack Bond on occasions, and can force Bond to take leave if required
- Can only act on orders, not take matters into his own hands (or is subject to discipline or dismissal)
- Q (another employee of the British Secret Service) provides all the equipment required (e.g. the car, the gun, the watch and spending money)
- Is not financially liable for the damage caused to the equipment, nor destroying the occasional Island etc
- There are other 00’s and all are employees
- If things go wrong, someone (hopefully) will come and get him
Fleming said: "I wanted the simplest, dullest, plainest-sounding name I could find, 'James Bond' was much better than something more interesting, like 'Peregrine Carruthers'. Exotic things would happen to and around him, but he would be a neutral figure—an anonymous, blunt instrument wielded by a government department."
The Jackel is an Independent Contractor (from the movie the Day of the Jackel). Evidence:
- He is contracted to carry out a specific task for a specific sum
- He selects the time and the method of delivery
- It is a one-off job
- He is responsible for his own safety, equipment, costs and escaping detection
- He may not know who the principal is
- The principal may not know who he is
- If things go wrong he’s on his own
- We don’t know if he has employees or an office, but he can recruit people to assist him
- He can work for others
- He has no loyalty to the principal nor their cause
“A professional does not act out of fervour and is therefore more calm and less likely to make elementary errors. Not being idealistic, he is not likely to have second thoughts at the last minute about who else might get hurt in the explosion or whatever method, and being a professional he has calculated the risks to the last contingency. So his chances of success on schedule are surer than anyone else’s, but he will not even enter into operation until he has devised a plan that will enable him not only to complete the mission, but to escape unharmed.”
Why are there continuing issues with this?
Many businesses do not want to have employees. But they need people to carry out certain tasks within their business so often recruit (poor choice of words) individuals to carry out those tasks. And they insist that the person is an independent contractor, even if the person wants to be an employee.
Typically this could be a courier and delivery driver (think parcels and fast food) where the principal wants a level of control but not the responsibility of PAYE, ACC, sick and holiday leave, cost of vehicles and equipment. And where they don't have to pay when there is insufficient work. These types of contracts often force the contractor to register for GST (whether they need to or not), require them to set up a contracting 'company', purchase and wear branded clothing, signwrite their vehicles with the principal's logo and enter into restraint of trade terms. Often, the contractor cannot have subcontractors, and is usually too busy to undertake any other contracts.
On the other side, the contractor may have little experience as a self employed person and often relies heavily on the support (for administration, methodology and financial advances) of their principal. Many are also wilfully blind to the contract they have signed, don’t take professional advice yet only complain when the tide or circumstances turn against them. And this can often occur when the contract is cancelled, or when they fail to pay their income tax and they are looking for an out of their predicament.
It is when the principal has too much power and the contractor has insufficient business experience and autonomy that trouble begins.
If the contract says “you are not an employee”, then all things being equal “you are not an employee”! “… where a contract is in writing the words used are to be taken as the expression of the parties actual intention…” [May v Armouguard Security Ltd  NZERA Auckland 208].
For there to be an employment contract, that contract “must satisfy the common law requirements of offer, acceptance, contractual intention, consideration and certainty” [McDonald v Ontrack Infrastructure Ltd [2010 NZEmpC 132].
Getting it right from the start is the key to knowing your future legal obligations and your relationships. If your independent contractor later successfully claims to be an employee you will be liable for PAYE, ACC, holiday and sick pay, plus be hauled before the Employment Relations Authority amongst other things.
Make sure you get it right by seeking help from a professional. If you need further information or advice then contact us.