Organisations engaging contractors or workers supplied by labour hire agencies (agency workers) must ensure they have been correctly classified. If a worker is found to have been incorrectly treated as a contractor or agency worker, this can have significant implications for the organisation that engaged them.
Organisations engage contractors or agency workers for many reasons. This might be because the organisation has a “freeze" on hiring employees, or because engaging a person or company is considered to be more efficient for the particular services that need to be performed.
However, engaging contractors or agency workers can give rise to a risk of the Employment Relations Authority (Authority) or Employment Court (Court) determining that these workers are, in fact, employees.
Although this issue is not new, it has received increased attention over the past year as a result of several recent judgments of the Court. It is an area where we are seeing a lot of activity, with unions and workers challenging long-standing industry practices in which workers have traditionally been engaged as independent contractors. The Court has also recently addressed the issue of whether Uber drivers are employees1 and this is an issue that looks set to be further contested in New Zealand (and around the world).
This article outlines the key questions to consider in determining whether your contractors or agency workers have been properly classified and summarises the recent Court cases that have addressed these issues.
Key employment status tests
Under the Employment Relations Act 2000 (ERA), when a contractor or agency worker asserts that they were or are an employee of the organisation that engaged them, the Authority / Court is required to determine “the real nature of the relationship" between the worker and the alleged employer. This requires consideration of “all relevant matters", and not just the contract in place between the parties.
The key tests that are applied when assessing the real nature of a relationship include:
The terms of the contract and the intentions of the parties: the terms of the contract, and any divergence from those terms, and the parties' intentions are relevant. However, the Authority / Court must not treat the parties' intention as determinative.
Control exercised by the business: this test considers the level of control or supervision exercised by a business over the worker's daily work, and whether this control is exercised in the manner of an employer.
Integration into the business: this test considers whether the work performed is integral to the business, and whether the worker has become “part and parcel" of the organisation. The more integrated a worker is into the business, the more likely they are to be an employee.
Whether the worker is fundamentally in business on their own account: this test looks at the economic reality of the relationship and may include reference to whether the worker performs services through a contracting company; whether they pay their own tax; if they have the ability to work for other clients etc.
Industry practice (where relevant): for example, if there is a general industry practice of hiring contractors versus employees. However, recent case law cautions against placing too much weight on a historic industry practice.
None of these tests individually will be conclusive; rather, the Court will apply them all to form an overall impression of the underlying real nature of the relationship between the parties. The Court has also noted that it can often be difficult to assess this as there may be factors pointing both ways.
It is important for businesses to consider these key tests prior to the commencement of a working relationship, and to reassess the working arrangements over time in case the nature of the relationship has changed. Even if an individual was originally properly engaged as an independent contractor, it is not uncommon for the nature of the relationship to change to one of employment based on how it operates in practice.
Recent cases challenging employment “status"
In the following three recent cases, the Court determined that individuals who were described (in the relevant contract) as independent contractors were actually employees:
Leota v Parcel Express Ltd concerned the status of a courier driver.2 A key factor pointing towards the real nature of the relationship being one of employment was that the courier company exercised a high degree of control over the courier driver, including setting the parameters of the courier driver's run and his customers. The courier driver had very limited opportunities to grow his own business in the course of his work. Although the courier driver signed a contractor agreement, the Court emphasised that the way in which the relationship is described in a written contract is not determinative (particularly when a worker spoke English as a second language).
Southern Taxis Ltd v Labour Inspector considered the status of four taxi drivers who worked on a commission basis.3 The Court found that the taxi company exercised significant control over the drivers' work (for example, the drivers worked to a roster and, in practice, did not decline work, they had to wear uniforms and drive branded vehicles), the drivers were not in business on their own account (for example, they did not own their own vehicles and were not registered for GST), and their work was integral to the running of the business as it was reliant on their availability.
In Barry v C I Builders Ltd,4 the Court held that although Mr Barry signed an independent contractor agreement, the real nature of the relationship was one of employment. The Court held that Mr Barry was subject to a high degree of control by C I Builders (including being told what to do and when), he was integrated into the business, and, although there was no express prohibition on working for others, it was unrealistic in the circumstances. The Court also briefly referenced the fact that C I Builders applied for and received a wage subsidy for Mr Barry during the Alert Level 4 lockdown in 2020.
In another recent decision, the Court examined the status of workers employed by a labour-hire agency who were supplied to work for a government department.5 In this case, the workers argued that their real employer was the government department. The Court disagreed, holding that the workers had properly been treated as being employees of the labour-hire agency. The Court considered that the government department and labour-hire agency had set up careful arrangements that clearly characterised the workers as employees of the labour-hire agency, and that that relationship operated in practice in accordance with the agreement.
Triangular employment relationship provisions
For completeness, even if an agency worker is found to not be an “employee" of the business that has engaged their employing entity (the
host entity), they can still seek to join that host entity to personal grievance claims as a “controlling third party". These claims can be brought based on the recent amendments to the ERA which allow for employees, employers or the Authority to seek to join a host entity to a personal grievance claim, if certain tests are met.
We have yet to see case law in the Authority or Court which definitively addresses these new ERA amendments, but note that this path is also open to agency workers.
Implications for businesses
The Court has been careful to emphasise that the employment status test is a fact-specific exercise and the outcome of each case ultimately depends on the particular circumstances of each case. In addition, a business should not “blindly" rely on general industry practice that certain types of workers tend to be contractors.
If a worker is found to have been incorrectly treated as a contractor or agency worker, this can have significant implications for the organisation that engaged them. For example, that worker would be entitled to statutory employment benefits (including access to the personal grievance regime, paid statutory holidays, and other employment-related benefits such as KiwiSaver) and there would also be potential tax exposure.
These cases serve as a timely reminder for businesses to reassess whether they have correctly characterised the nature of their relationship with contractors and agency workers and the potential (costly) consequences of getting it wrong.
If you have any questions about the matters raised in this article please get in touch with the contacts listed or your usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.