Contractor vs Employee – Important Updates

There has been ongoing confusion around whether someone working for you is an employee or a contractor.  This has been debated in courts for years and has implications for what the person is entitled to.

The Employee Relations Amendment Bill has been passed into law recently with immediate effect.  This includes an intention to improve certainty to businesses

It introduces a “Specified Contractor” gateway test.  If a worker meets all the criteria of this test, they cannot later challenge their status in court to claim they were actually an employee.

This can offer some protection but requires very strict adherence to the rules – you must meet all the criteria.

The 5-Pronged Gateway Test

To qualify as a “Specified Contractor,” the arrangement must meet all of the following:

1.       Written Agreement: There must be a written contract expressly stating the person is an “independent contractor” or “not an employee.”

2.       Freedom to Work for Others: You cannot stop them from working for other people (including competitors), except during the actual hours they are performing work for you.

3.       Flexibility or Subcontracting: The worker must not be required to work at specific times/days OR they must have the right to subcontract the work to someone else.

4.       No Penalty for Refusal: You cannot terminate the contract simply because the worker declines a specific task or engagement that is outside the original agreed work.

5.       Opportunity for Advice: The worker must have been given a “reasonable opportunity” to seek independent legal advice before signing the agreement.

I have seen in many small businesses a contractor arrangement is assumed as it is less risky than having an employee.  In many of these cases the person should probably have the rights of an employee.

There are two areas where many small businesses will fail this test.  Firstly, there is no written agreement.  Secondly there is no flexibility in working hours or ability to subcontract.  If you need your staff to turn up at 7.30 am onsite every morning and be there until 4.30pm without the ability to subcontract to someone else, you are likely to fail this test.

If you cannot pass this test and the relationship is challenged in court, then you fall back under the “Real Nature of the Relationship” test, where a judge might rule that they are actually an employee entitled to holiday pay and sick leave.

If you have staff that fall into a grey area, or don’t have a written agreement in place, make sure you get the right advice from an HR expert.

At a minimum you should be reviewing any written contractor agreements that you do have to ensure there is certainty to pass the Gateway test.

For more information on other areas included in the bill, visit: https://www.employment.govt.nz/news-and-updates/employment-relations-act-changes-take-effect-today

Thanks to the author for this article: Ann Gibbard