How to determine whether your worker is an employee or independent contractor

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Independent contractors can offer a host of benefits to employers but if they’re categorised incorrectly, organisations could be putting themselves at serious risk. Here, one industry lawyer offers her guidance on getting it right.

“A relationship with an independent contractor is contractual and is not subject to the provisions of the Employment Relations Act so when you hire an independent contractor, that can provide clear advantages for business owners,” says Susan Rowe, a partner with Buddle Findlay.

“However, you need to take care to ensure the relationship doesn’t become, in substance, one of an employer and employee.”

According to Rowe, some employers still believe that just because they’ve used the terminology ‘independent contractor’ or ‘contracted services’ that the situation will remain that way – but it’s just not the case.

“New Zealand courts and New Zealand employment law looks at substance over form so they look at the real nature of the relationship – the fact that your agreement might label a person an independent contractor won’t be determinative,” she says.

To test whether your independent contractors are actually employees, Rowe says organisations should consider three key aspects.

“The first is called the control test – that’s essentially the degree of control or supervision exercised by the employer over the employee’s daily work,” she tells HRD.

The next test is called the integration test, where employers must determine if a person has become so integrated into the workplace that they’re effectively part and parcel of the organisation.

“When you look at that, you should think about things like; is someone on the phone list, are they given business cards, do they use their own equipment, are they coming to office social functions – from the outside, would people assume they were an employee or would they know they’re actually separate from your business?”

The third test, which Rowe says is slightly trickier to determine, is called the economic reality test.

“Some of the things you can look at for that are; are they paying their own taxes, was it very clear at the outset that they wanted to be a contractor and that’s how they’re running the business, are they paying ACC levies, are they paying PAYE themselves?” she tells HRD.

Other indicators also lie in industry practice, says Rowe.

“Sometimes there’s a body of law built up that will suggest that people in certain industries are contractors or employees – it’s not determinative but it’s a good indication,” she says.

“Also, they tend to look at other points, not necessarily in this order, but they’ll look at the terms of the agreement, how it operated in practice, intention, things like that, but the three main ones are control, integration and economic reality.”

 

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