Employment Law for Independent Contractors
With more New Zealanders choosing independent contracting over traditional employment, it's crucial to understand how the two differ legally. While contractors enjoy greater autonomy, they also face unique risks and obligations. For the business using contractors, it is important that they understand the implications of wrongly classifying a contractor. This article will examine how to navigate these arrangements effectively.
How Do Contractors Differ from Employees?
The line between contractor and employee isn’t always obvious. In disputes when deciding a worker’s status, the Employment Relations Authority considers several factors, such as the level of control the hiring party has over the work.
If they dictate how, when, and where tasks are performed, it leans towards an employment relationship. Independence is another key consideration — contractors can often take on multiple clients or subcontract work, unlike employees. Taxation is also handled differently; employees have PAYE deductions, whereas contractors must manage their own taxes.
Finally, the party providing tools and equipment can be a deciding factor. Employees typically use company resources, while contractors supply their own.
Employees receive benefits like annual leave, sick leave, and employer KiwiSaver contributions. Contractors, on the other hand, are responsible for managing (and financing) these aspects themselves, making it vital to plan ahead.
Why Misclassification Matters
Incorrectly classifying an employee as a contractor can create significant legal issues for businesses. If it is deemed that they are actually an employee, then the Employment Relations Act 2000 (“ERA”) applies to the relationship and they will likely become liable for unpaid wages, holiday pay, and other entitlements, as well as face penalties for not deducting PAYE or contributing to KiwiSaver. Beyond financial repercussions, the ERA personal grievance framework would apply to the relationship.
A recent and significant case in this area involved Uber drivers. The New Zealand Court of Appeal applied established tests to differentiate between contractors and employees, focusing on the practical realities of the working relationship rather than just contractual labels. Central to this determination were the "control," "integration," and "fundamental" tests.
For workers, being misclassified may mean missing out on critical rights and protections, including the ability to lodge a personal grievance. It’s important to clarify the nature of the working relationship upfront to avoid this.
Legal Framework for Contractors
Contractors operate under different laws compared to employees. Their rights and responsibilities primarily stem from the terms of their contract, which forms the foundation of their working relationship.
The Fair Trading Act 1986 offers additional protections, ensuring contractors aren’t subjected to unfair contract terms or deceptive practices. However, contractors are also responsible for handling their own tax obligations, including registering for GST if they earn over $60,000.00 annually.
Negotiating a Strong Contract
A well-drafted contract can prevent misunderstandings and disputes. It should clearly outline payment terms, including the rate, frequency, and invoicing process. The scope of work and deadlines must also be detailed to manage expectations. Termination terms, such as notice periods and conditions for ending the agreement, are equally important. Lastly, it’s wise to include a dispute resolution clause, specifying steps like mediation or arbitration in case conflicts arise.
Handling Disputes
When conflicts arise, contractors have several options:
- Attempt to resolve issues informally with the other party.
- Seek support from the Ministry of Business, Innovation and Employment (MBIE) or private mediators.
- For payment disputes, options include the Disputes Tribunal or issuing a statutory demand, if the debt exceeds $1,000.
- If the debt is over $30,000, you may apply to the District Court for relief.
- For contractors working in the construction industry, the Construction Contracts Act 2002 provides a streamlined process to resolve payment disputes.
Upcoming Changes?
The New Zealand government is considering introducing a 'gateway test' to clearly differentiate contractors from employees based on specific criteria, offering clarity and reducing legal uncertainties. These proposed criteria can be viewed here.
This development underscores the importance for businesses and workers to carefully assess their working relationships, considering factors such as control, integration, and the fundamental nature of the work performed.
It’s essential for contractors and businesses to stay informed about these developments as they may impact future agreements and rights.
Summary
Contracting can offer significant benefits, but it also comes with responsibilities. Whether you’re a contractor or a business hiring one, understanding the legal landscape can spare unnecessary time and money spent.
When in doubt, seek professional advice to avoid costly mistakes. Checketts McKay Law have an expert team of employment law advocates who are willing to assist at any point along the way.