Key distinctions between contractor and employee in New Zealand

This article was current at the time of publication.

Practitioners advising business clients need to heed recent developments in employment law regarding employees and contractors.

Drivers v Uber

The Court of Appeal is considering its judgment on the Uber case, in which four Uber drivers claim to be employees, despite having contractor agreements.

The Employment Court ruled in October 2022 that the drivers were, in fact, Uber employees.

The Government has also adopted, but not yet actioned a policy, put forward by the Association of Consumers and Taxpayers New Zealand (the ACT Party), to amend the Employment Relations Act.

 This policy would exclude “independent contractors who have specifically signed up to a contracting arrangement” from challenging their status in the Employment Court. 

The Uber case demonstrates that using different contract documents for employees and contractors doesn’t completely protect employers.

Here’s Louise Miao, an associate specialising in employment law, at law firm, LegalVision: “While it is possible to draft a comprehensive and detailed contracting agreement, there is no such thing as a truly ‘watertight‘ agreement that eliminates all risks or potential disputes, particularly in regard to sham contracting. 

“Employment and contracting laws, as well as court judgements, can change over time, and the specific circumstances of each case can impact the interpretation and enforcement of the agreement.”

Pros and cons of contractors

Miao says there are many benefits in using contractors, if circumstances warrant. These include:

• Employers can reduce overhead costs using contractors because they don’t need to pay for employee-related benefits such as taxes, PAYE or KiwiSaver.
• Using contractors can provide more flexibility in terms of workload and project duration.
• Contracting arrangements can provide the ability to tap into specialised skills or expertise on an as-needed basis, without committing to an employee.
• Terminating a working relationship with a contractor is easier than dismissing an employee.
• Contractors are generally responsible for their own tax obligations, although this excludes contractors with schedular payments.

On the other hand, using contractors rather than employees has several drawbacks, including:

• Employers have less control and oversight over the work performed and how it is carried out, as contractors are generally specialists in their field.
• Matters of confidentiality and protection of intellectual property have the potential to become problems.
• Misclassification of a contractor who is deemed to be an employee by law, can be costly for the company.
• Contractors can have less loyalty and commitment to the company, compared to employees.
• Employers have limited ability to direct the work and set schedules and deadlines.

Nail your definitions

A guide to the current definitions of employees and contractors, and the tests applied by courts to distinguish between the two, can be found at Employment New Zealand.

Employment New Zealand flags that “to make the correct decision you must focus on the real nature of the working relationship, not just the label the parties are calling it.”

The courts have developed four differentiation tests.

The Intention Test counts as relevant what the parties intended the relationship to be, but doesn’t on its own determine the true nature of the relationship.

Employment New Zealand again: “You can usually work out what the intention is from the wording in the parties’ written agreement.” 

Know the difference

The Control versus Independence test holds that “the greater the control exercised over the worker’s work content, hours and methods, the more likely it is that a person is an employee.”

“A worker with greater freedom to choose who to work for, where to work, when to work, the tools used and so on, is more likely to be a contractor.”

The Integration Test determines whether the work performed by the person is fundamental to the employer’s business, and whether they’re ‘part and parcel’ of the organisation - the work performed by a contractor is usually only a supplementary part of the business.

The Fundamental/Economic Reality test looks at the total situation of the work relationship to determine its economic reality.

This involves examining the mechanics of the relationship, including whether an invoice must be issued in order for the work to be paid for; who pays ACC levies; ability to subcontract; and whether the worker performs work for several entities, or only one.

Get it in writing

Miao says there are other pitfalls, apart from the risk of legal challenge to the contractor’s employment status, that employers should be aware of before entering into a contract arrangement.

These include a lack of clear agreements or contracts outlining roles, responsibilities, and expectations; failure to properly manage and review contractor performance and deliverables; intellectual property ownership issues if not explicitly addressed in the agreement; and unenforceable restraints of trade clauses in the agreement.

She says there are steps employers can take to mitigate the risks.

These include writing in provisions for intellectual property ownership and confidentiality; regularly reviewing and updating agreements to reflect changes in laws or circumstances; including a reasonable restraint of trade clause, and when necessary, seeking legal advice around the risks of sham contracting and the relevant legal tests that apply.