Law Blog: Contracting Solutions to Avoid Employees?
General / 25 December 2015
By Lucia Vincent
Employees cost employers cash. Not just wages, but the risk involved when dismissing staff, can cost businesses more than they bargained for. Personal grievances, irrespective of merit, can cause considerable expense to defend. Even if an employer successfully defends itself, the legal fees and loss of time and productivity (not to mention the stress for those involved), all add up. When offered an alternative, like engaging contractors, one can appreciate why a weary employer sees it as an attractive option. But doing so solely to avoid employees won’t always work.
Considering the Alternative
Fear of or attempting to avoid personal grievances does not justify engaging an employee as a contractor. Even if you agree with an individual that you will contract their services and not employ them directly, an individual may still be recognised and subsequently, successfully claim they were an employee. Learning why and how to appropriately engage contractors becomes crucial if a business is to avoid unwittingly ending up employing someone anyway.
Selecting the Right Relationship
Knowing what you require and recruiting the right person, whether a contractor or employee, is essential. Otherwise good working relationships can too often be ruined by failing to select the right relationship in the first place.
We all know the benefits hardworking, talented and committed employees bring to a business. You can rely on the implied obligations of good faith and fidelity. Staff must consistently act in their employer’s best interests, follow all lawful and reasonable instructions, and cannot do anything that actually or is likely to undermine the relationship of trust and confidence. An employer may control and hold an employee accountable for their work and time, insist on undivided loyalty to their business, and discipline any untoward behaviour, keeping in mind the requirements of fairness and reasonableness.
But an employer must also consider and comply with many implied obligations. An employee automatically enjoys many minimum entitlements that a contractor does not. Employment legislation requires an employer to pay at least the minimum wage and provide paid holidays and leave. The consequences of failing to comply can be significant and is worth considering and calculating.
A contractor may provide specialist skills that a business requires urgently or only temporarily and that would not otherwise be available in an employment relationship or for the timeframes and budgets needed. For example, you may engage the services of a consultant who retains the flexibility to work at times that suit them and for other businesses. You can legitimately limit the timeframes without having to comply with the requirements of casual and fixed term employment arrangements too.
In contrast to employees, contractors work for themselves. They usually supply their own staff and equipment. They can be GST registered and take care of their own insurance and taxes. Under a contract for services (rather that a contract of service), contractors are not automatically entitled to paid leave and holidays. A business can generally terminate the relationship much more easily than with staff. The remedies for breaching a contract for services are more likely to be something like damages for beach of contract without recourse to employment law.
Disputing the Difference
As with any relationship, it can become complicated. If parties begin arguing over what type of relationship they are in, the Employment Relations Authority or Employment Court can decide for you.
Under section 6 of the Employment Relations Act 2000 (Act), the Authority or Court must determine the real nature of the relationship, after taking into account all relevant matters that indicate the intention of the parties. Although parties might have a contract that says someone is a contractor, the Authority or Court could find otherwise because it is more concerned with “substance than with form.” 1
All relevant factors include any common intention of the parties as shown by a contract or how the relationship operated in practice, the integration of the individual into the business, the control exercised over and by the business over an individual, any industry practice and/or taxation matters, and ultimately, whether an individual is truly in business on their own account.
In a case involving movie making and a set model technician, the Employment Court considered a relationship to be of an employment nature despite the technician being referred repeatedly to as a contractor in a written contract.2 Key to the technician’s success in claiming to be an employee was the control exercised by the employer over hours of work and how work was done, the provision of most tools and equipment and the availability of discretionary sick leave. The technician had worked as an integral part of the business and was not in business for himself like a contractor would have been.
After the Government’s swift response to Hollywood’s threatened exodus from New Zealand, a presumption now exists that those engaged in film production work are not employees. The Act expressly excludes certain persons in relation to a film production unless a person is a party to, or covered by, a written employment agreement that provides for the person being an employee. Real estate agents, volunteers and sharemilkers also have special exclusions.
But it would be impossible to provide an accurate or exhaustive list of what types of relationships may be considered that of employee and/or contractor. It will always depend on the facts of the case and the application of the law.
Talking about it
Someone recently asked me whether their boss could force them to be a contractor. But it wasn’t really a question I could give a yes or no answer to. After being teased about being a typical lawyer who couldn’t give a straight answer, I explained I was making sure I properly understood the situation before giving advice (otherwise you may as well flip a coin). After asking a few probing questions and receiving reluctant responses, I established the real problem – the two just hadn’t talked. They had both assumed the other felt the same way about their relationship and didn’t bother to discuss it let alone record it in writing. Months down the track, an awkward conversation about who should be paying tax and providing holidays, has caused them both much anxiety and cast doubt on the future of their relationship. The two could have easily avoided all that by talking about it at the start.
Getting it Right
The same logic applies to your working relationships. Establish what your business needs and go about getting it. If you need someone devoted to your business that you can train and retain to grow with you – then you probably need dedicated and loyal staff. If you urgently and briefly need specialist expertise that you don’t have in-house, contractors can provide that service to you. Easy.
Next, record it in writing. While there is not always a legal obligation to record your contractor’s agreement in writing, it would be helpful to have a common understanding in a contract that you can discuss if you dispute something down the track. Employees of course must have a written agreement. But do drill down to what the real nature of the relationship is – just having a document that records that the relationship is one or the other won’t trump reality. Monitor the relationship over time and if things change, update your agreement. If in doubt, seek advice – think of it as an investment that reduces the risk of getting it wrong.
32, Koia v Carlyon Holdings Ltd (2001) 6 NZELC 96, 407
Bryson v Three Foot Six Ltd (2003) 7 NZELC 97, 317
We remind you that while this article provides commentary on employment law topics, it should not be used as a substitute for legal or professional advice for specific situations. Please seek guidance from your employment lawyer for any questions specific to your workplace.