Contractor or Employee? The Cost of Misclassification
We commonly come across scenarios where workers are misclassified as independent contractors. What can be a simple exercise to get wrong can result in costly implications for a business.
Wrongly classifying a worker as a contractor, who is in reality an employee, opens the gateway for a claim to be made against a company for a range of statutory entitlements. These entitlements include minimum wage, holiday pay, redundancy, and personal grievance procedures and remedies under the Employment Relations Act 2000 (Act). There may also be tax implications for a business.
The definition of an employee under section 6 of the Act means “any person of any age employed by an employer to do any work for hire or reward under a contract of service.”
However, it is not enough to simply label the status of a worker as a “contractor” under a contract for services. Often it is the case that an independent contractor agreement exists which reflects that the worker has been labelled as a contractor. It is crucial that the label ascribed to the worker’s status, (being an independent contractor), truly accurately reflects the real nature of the relationship in practice.
The status issue was helpfully described in the recent Employment Court case of Leota v Parcel Express Limited  NZEmpC 61, as follows:
 An employee works for the employer, within the employer’s business, to enable the employer’s interests to be met. An independent contractor is an entrepreneur, providing their labour to others in pursuit of gains for their own entrepreneurial enterprise.
In determining a worker’s status, the Employment Court or the Employment Relations Authority must determine the real nature of the relationship. Relevant to this assessment includes the intention of the parties. This first question will be: did the agreement describe the worker as an independent contractor, and if no contract exists, did the parties intend to structure their relationship as one of principal and contractor? However, neither the parties’ intention, nor labelling the worker as an independent contractor, are determinative.
If the parties’ intention is established, the essential issue will then turn on whether the worker serves their own business or someone else’s business (commonly referred to as control, integration and economic reality tests). Each assessment will turn it on its own facts.
The difficulty this presents is that there is a variety of factors to be analysed. Nor is there a presumption that whole categories of workers are independent contractors. Therefore, determining if a worker is an employee involves an intensely fact-specific inquiry.
In 2020, Employment Court heard two notable cases involving workers being deemed to be employees which provides tales of caution to businesses.
In the case of Leota, it held that a driver for a courier company subject to a signed independent contractor’s agreement was in reality an employee. In Southern Taxis Ltd v A Labour Inspector  NZEmpC 63 the Employment Court found that four commission drivers for a taxi company were in fact employees.
In contrast, in the Employment Court decision of Arachchige v Rasier New Zealand Limited & Uber B.V .  NZEmpC 230 it found that an Uber driver was correctly classified as an independent contractor.
As per the cases referred to above, there are a number of factors which may point towards, or away from, an employment relationship. A table of the usual indicia was set out in the decision of Leota which will serve as useful guidance when embarking on making such an assessment.
The table from Leota is set out below:
As per the above table, it is clear that determining a worker’s classification is not simply a contractual, economic exchange. It involves a variety of factors to be weighed up which involves an intensely fact-specific enquiry.
If you are contemplating engaging a contractor for your business we recommend seeking advice from our employment team to ensure that the classification is correct before entering into a contract for services arrangement.