A veritable minefield of employment law.
From a legal perspective, hiring contractors has always been tricky. The onus of correctly identifying who is an employee versus a contractor, and ensuring legal compliance, remains an employer’s responsibility. The financial consequences of misidentification can be significant for a business owner.
With the rise of the ‘gig economy’, employers are increasingly relying on contractors to fulfil essential roles, so correctly identifying these people’s employment status is more important than ever. The Employment Relations Authority has been very clear that it does not matter that a ‘contractor agreement’ is in place, if the individual behaves like an employee, their employer is responsible for ensuring compliance with the Employment Relations Act 2000 and will be penalised if they fail to do so.
We explore the key features to differentiate between contractors and employees, and what changes may lie ahead for those who fall into the grey area in between.
Defining a contractor
A contractor is a self-employed person who is engaged to provide services privately under contract law and issues invoices for those services. As such, the Employment Relations Act 2000 and all associated entitlements do not apply to the relationship. Key identifying features of a contractor are:
- They have their own business and are responsible for all their own taxes and associated expenses such as ACC levies
- They are considered to have an equal bargaining position to the business they are contracting with (in contrast to the power imbalance between an employer/employee)
- The relationship may not be exclusive
- They will ordinarily have an element of control or discretion over their daily tasks and work, and
- Under normal circumstances they are freely able to accept or decline work.
Who is an employee?
Anyone who is not clearly a contractor should be considered an employee until determined otherwise. Red flags should be raised to treat an individual as an employee if there is little discretion on daily tasks, an exclusivity of relationship or they do not complete all their own financial accounting and reporting.
If they are an employee, you will need to assess if they are casual, part-time or full-time and are provided with the appropriate employment agreement and entitlements.
Consequences of getting it wrong
Misidentifying your employee as a contractor can give rise to a personal grievance (PG). The outcome of that PG could result in your employee being entitled to backdated entitlements such as annual leave and sick leave all the way through to the beginning of the relationship. There may also be other financial penalties imposed by the Employment Relations Authority.
Introducing the ‘dependent contractor’
A grey area arises when a person clearly runs their own business but works exclusively for one company or depends heavily on one contract for an income, and has very little discretion in daily tasks.
An example of this is a courier driver who owns their own vehicle, runs their own accounts, is free to contract with third parties and take on additional duties. For the majority of the time, however, they work for one company, are dependent on one income source and have very little control over the day-to-day activities as this is dictated by that company.
The government has consulted on a proposal to introduce legislation designed to protect this type of vulnerable worker. A new category under employment law is proposed called the ‘dependent contractor’ that is designed to protect and enhance the entitlements of this type of contractor such as a courier or rideshare driver. These contractors’ protections would be extended into parts of employment law which means a dependent contractor may be entitled to certain benefits such as sick leave.
These proposals have not been finalised and further consultation is expected this year. If this proposal is enacted, employers will need to be proactive in promptly reviewing and reclassifying (if necessary) their workforce to ensure all dependent contractors are given their new protections and entitlements.
Classify your employees
Ensuring your employees are correctly classified as contractors or employees is essential. Roles such as marketing, social media management, IT support, website management and virtual assistants are all examples of valid contractors who, under the right engagement circumstances, could be considered employees or, if the new proposal becomes law, a dependent contractor.
If you have concerns about correctly classifying an existing contractor or you are a contractor but believe you are probably an employee, please feel free to discuss this with us.