Every year a significant number of employers appear before courts and tribunals in cases to decide whether a worker is a contractor or employee.

The importance of classifying a worker on the correct terms cannot be understated. Incorrectly engaging and treating an employee as a contractor can prove incredibly costly.

In a recent case, the Employment Court ordered an employer to pay 4 employees nearly $80,000 of unpaid entitlements. The employer had treated the workers as contractors for several years and, as a result, had not provided them their minimum employee entitlements.

The employer was liable to repay wage arrears, holiday pay, and rest breaks allowances.

Note that some payments will be ordered even if an employer has allowed for the entitlements (e.g. holiday pay) by including an additional 8% in the hourly rate paid to those workers claimed to be contractors.

Often there is initially a genuine belief by the employer and worker that there is a contractor arrangement. Sometimes, the employer may even be aware that the agreement is incorrect, but prefers inaction as both parties are currently happy with the arrangement.

We have seen scenarios where workers in these arrangements become dissatisfied and decide to pursue their entitlements, resulting in great disruption, and expense, to the employer.

When determining whether a worker is an employee or contractor, the courts have made it very clear; just because an employment agreement refers to a person as a contractor, does not necessarily mean they are a contractor.

To determine the true nature of the employment, courts apply 4 tests.

1. What was the parties’ intention?

The court takes into account what the parties intended when they entered the relationship.

The factors taken into account include:

• What the contract says. Is it a contract of service (employees) or contract for services (contractors)?
  
  
• Did the person hired want to be a contractor? This might be so they could be in business for themselves and claim benefits not available to an employee. Did the employer offer the person the choice and they chose to be a contractor?
  
  
• Whether the employer is paying holiday pay. Contractors are not entitled to holiday pay.
  
  
• Whether the worker is paid time and a half on public holidays or given a day in lieu. Employees receive public holiday entitlements, contractors do not.
  
  
• Whether the worker is given annual leave. Contractors do not get annual leave from the organisation who hires them.

2. Is the worker integrated into the business?

Is the person really part of the employer’s business and treated like an employee?

The factors taken into account include:

• Who provides the work equipment? Contractors generally provide their own work equipment and vehicles. Additionally, contractors will also normally pay for the operational costs and maintenance of equipment and vehicles.
  
  
• How are they paid? Contractors are normally paid according to the work they complete, but an employee is paid by the hour or as a salary.
  
  
• Whether the worker wears a uniform or has been integrated into a team. Contractors usually work alone, and often for more than one employer. Therefore, contractors do not generally wear an employer’s branding. Although not always the case, if the worker does work in a team with employees, or wear employer branding, this is a strong indicator that the worker has been integrated into the business.

3. Is the person under the control of the employer?

The control test focuses on how much control an employer has over a worker. Generally, employers will have greater control over employees and how, when, and where their tasks are done. Contractors have more flexibility.

Factors in this test include:

• Whether the employer decides what work is to be done, when, and from what location.
  
  
• Whether the worker has any ability to decide if they shall take on the work or not. Contractors can generally decide if they are available to take on work.
  
  
• The level of any supervision. Contractors are generally hired for the particular skill set in a field. Once provided with a task by an employer, there tends to be little to no supervision.

4. The “fundamental” or “economic reality” test…

This test considers that contractors are self-employed and running their own business. There are a number of factors that are unique to contractors. These include:

• Whether the employer is invoiced for work done. Employees do not invoice their employer.
  
  
• Whether the employer pays the taxes. Employers pay PAYE to the IRD for their employees, whereas contractors pay their own taxes.
  
  
• Who holds the risk and reward? A contractor risks losing money if they fail to complete a job on time or are not paid by the employer. On the other hand, they are also able to decide how many jobs to take on, and benefit from any increase in profit.
  
  
• Whether there is more than one employer. Contractors may work for more than one employer. This is particularly the case when specialist skills are offered by the contractor, which may be desirable to several employers at the same time.
  
  
• How the person obtains work. Employees will usually find work through responding to job advertisements or distributing CVs. Contractors generally advertise their business.

An employee or contractor is unlikely to fall neatly under every point in the tests. Sometimes workers might even appear to be employees under one test and contractors under another. Where there is uncertainty, courts look at an overall assessment.

If there are concerns about whether staff are contractors or employees, or if you think you are being incorrectly treated as a contractor, it is wise to speak with a professional experienced in the area.


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Alan Knowsley
Employment Lawyer
Wellington