When is a contractor actually an employee?

20 May 2020

The looming economic recession triggered by the coronavirus pandemic is going to lead to significant unemployment.

There will be many businesses seeking to re-pivot and restructure to make themselves more sustainable in the current climate.

These companies may find independent contractor arrangements much more attractive than hiring employees.

Contractors do not have personal grievance rights, and they generally have to pay GST on payments made to them. They also do not get holiday pay, sick leave or parental leave and often contracts for independent contractors can be terminated simply with a short notice period.

Similarly, with an increasing unemployment rate there may be many workers willing to accept contractor arrangements in order to obtain income, even if that means they have less security and limited rights.

Contractor arrangements can undoubtedly have their benefits. Those providing services, particularly those running a business on their own account, often do not want to be employees.

But there are other people who would no doubt prefer the protection and benefits of employment.

For instance, in New Zealand most courier drivers are engaged as contractors. However, for several years, unions and advocacy groups have raised questions about lack of employment protections, such as not receiving minimum wage.

Very recently the Chief Judge of the Employment Court decided that courier driver Mike Leota was not a contractor engaged by Parcel Express Limited, but was an employee of the company. This was despite the fact that he signed contractual documents that declared him to be a contractor.

The Chief Judge pointed out that the legal test set out in the Employment Relations Act requires the court to determine the real nature of the relationship between the parties.

In Leota's case, English was his second language, he was recruited through his church and he did not have a sophisticated understanding of legal matters. The fact that he was not encouraged to take the engagement documents to a lawyer or other suitable person to get advice before signing it did not help Parcel Express Limited.

While some of the factual background supported him being a contractor such as his obligation to buy his own van (assisted by the company) and to organise driving cover if he wanted to take leave, Parcel Express retained a high level of control over Leota. The labelling of Leota as an independent contractor in the contractual documents was only one factor for the Court to consider.

The Court was clear that this case decided Leota was an employee and not a contractor because of the facts applying to him. It was not making a general ruling for the courier industry. Regardless it is a warning light to anybody seeking to create an independent contractor relationship with a provider of services in this coronavirus recession. Be on your guard.

Indeed, the case follows an ongoing trend in New Zealand of the courts and government seeking to protect vulnerable workers in various industries who are engaged as independent contractors to allow those creating the relationship to avoid their employment obligations.

In November, MBIE released a discussion paper proposing options to provide better protections to contractors. This was in line with Labour's election promise to introduce "dependent contractors" - a class of workers that has many of the freedoms of a contractor, but some of the rights of an employee.

This a trend that is being seen around the world. The 'gig economy' has triggered a response. We are seeing a growing class of flexible workers classed as "contractors", such as Uber drivers, IT consultants, web developers and so on. Many of the new breed of contractors are happy with their status but governments are struggling to ensure these service providers are not taken advantage of.

Readers may have seen California's attorney general and a coalition of city attorneys in the state sued Uber and Lyft recently, claiming the companies wrongfully classified their drivers as independent contractors.

This followed the introduction of a law there earlier this year that required companies to treat service providers as employees if the companies in question control how service providers perform tasks or if the work is a routine part of a company's business. The law was introduced to give workers in the "gig economy" access to employee benefits.

The growing judicial and government focus on independent contractor arrangements may be particularly relevant in light of the effects of the Covid-19 pandemic.

Companies seeking to utilise the "gig-economy" model, or independent contractor arrangements in general, to reduce costs and obligations should think hard about the legality of this arrangement.

The growing national and global focus on protecting individuals who are customarily engaged as contractors indicates that industry practice provides limited protection, and the courts and legislature will endeavour to protect vulnerable workers.

Those who are truly in business on their own account are more likely to be seen as independent contractors. Often, they will operate through a company, and will be highly skilled. Many will do work or provide services to several clients. Individuals working in such arrangements are much more likely to be seen as independent contractors than a person in Leota's position.

I have no doubt that independent contractors are here to stay. The Leota case reminds us that engaging someone as a contractor is a significant decision and it needs to be entered into thoughtfully and carefully and with both parties taking proper legal advice.