Employee or subbie?

It’s important to be aware of the difference in law between a contractor and an employee, and whether the relationship with your contractors has progressed to the next level.

Subcontracting and labour-only contracting are common in building and construction industries and can be a convenient, efficient way of engaging labour. However, there can be hidden risks with such practices.

Simply labelling an agreement as an “independent contractor agreement” does not, of itself, determine the relationship’s legal status. Although it is still important to get the documentation right, the real nature of the relationship in practice will be the key factor.

So why are these issues so important?

If a contractor’s status is successfully challenged and they are found to be an employee, the employer may be faced with serious ramifications. For example, if the employer decided to terminate the engagement without cause (which is a common feature of an independent contractor agreement), a successful unjustifiable dismissal claim could be brought by the worker.

The employer would then be liable for accrued holiday pay, sick and bereavement leave dating back up to six years. The employer would also need to account for unpaid PAYE deductions to the Inland Revenue Department and potentially pay a penalty and interest for late payment.

The courts consider a number of factors when determining whether an employment relationship exists. In essence, people who are classified as contractors, but who are closely controlled and directed by a principal and/or are integrated into the principal’s business and/or are not performing services as a business on their own account may (if they challenge their status) be held at law to be employees.

“If a contractor’s status is successfully challenged, and they are foudn to be an employee, the employe maybe faced with serious ramifications

It is important in each case to balance all the circumstances of the relationship between the parties, in order to determine the true status of the worker.

As a general rule, the following features are indicative of an employment relationship:

• Set hours and days of work.
• Receiving payment for overtime.
• Being provided with a company vehicle and using the company’s tools and equipment.
• Not being able to profit from managing work efficiently.
• Being subject to a high degree of control over day-to-day activities.
• Being subject to PAYE and other deductions such as ACC levies required to be made by the employer.
• Being bound to one employer and not being permitted to compete/offer skills to another employer.

Conversely, the following features are indicative of a principal-contractor relationship:

• Being registered for GST purposes and personally responsible for ACC levies and all other insurance and tax responsibilities.
• Providing own equipment.
• Meeting own fuel costs.
• Having no guarantee of any particular level of work.
• Ability to earn greater levels of income depending upon availability of work.
• Work being performed not being integral to the main business of the company.
• Ability to provide services to different organisations.
• Ability to make a greater profit from the manner in which one’s own time and affairs are organised.
• Being required to remedy defective work at their own cost.

We recommend you undertake a review of your existing contractor arrangements to satisfy yourself that there are no potential issues as to the contractor’s status.

“The courts consider a number of factors when determining whether an employment relationship exists

We also recommend, when engaging a contractor, that the parties enter into an appropriately worded agreement, which properly reflects how the relationship will operate. Although the nature of an independent contractor’s relationship can ‘evolve’ over time, care needs to be taken that this evolution does not result in an employment relationship.

More information

If you have any questions about these issues, or would like to discuss the above in detail, contact John Rooney at john.rooney@simpsongrierson.com or Carl Blake at carl.blake@simpsongrierson.com.

The information in this article is intended as a general guide only and is not intended to be legal advice. Detailed advice should be obtained to cover a specific situation.