Latest Safety & HR News

27 September 2018

Is my Worker a Contractor or an Employee?


It is easy to confuse if a worker is a contractor or an employee for the small business because the nature of the work often means the lines are blurred.  Relying on your employment agreement or contract may not be enough.

Recently I was doing work with a client and we were talking about how he engaged his team and got on to talking about if they were contractors or employees.  He said they were contractors, but that the business paid their paye and other business costs for the worker and that they reimbursed them their travel costs. When I asked what made the m think their workers were contractors the client advised that they were told by their accountant that their workers were contractors and that it was alright to pay their PAYE for them and reimburse their travel becasue they were clearly contractors. In this instance the conversation idetnified that the balance of probability fell in favour of the relationship being an employment relationship. 

If a dispute arises, which they do, our courts look at the 'true nature' of the relationship to determine if the worker is an employee or a contractor.  To do this they apply four tests being the 'intention test', the 'control or independence test', the 'integration test' and the 'fundemental or ecomonic reality test'. It is the application of all four test that determines if the worker is a contractor or employee.  No single test is definitive of itself.

The intention test looks to the agreement or contract to determine through the wording what the true intention of each party was.  They will look at what payments are in place, if any form or holiday or leave is paid, and if an agreement is in place. Contractors would not be entitled to any leave and a written contrctract is not required by law.  An employee must have a signed agreemnt inplace before they can start work. However, it is not uncommon for business to engage staff as employees before they sign an agreement, and the effect is the subject of a separate article.

The control or independence test looks at the degree of control of each party in the relationship.  The greater the degree of control exerted by the business suggests the more the relationsip would be that of an employment one.  The greater the control is in favour of the worker, the greater the worker would be a contractor. Standard considerations would be the control over the work, the availability requirement, how work hours are set and the ability to engage sub-contractors and the level of supervision imposed. Employees would normally have a higher level of supervision and less control over how or when the work is undertaken that a contractor.

The integration test looks to determine if the work undertaken by the worker is an integral or a fundemental part of the business, or is it supplementary to the business needs. If the work performed is fundemental to the business it suggests an employment relationship, whereas a contractor tends to be more supplementary. Typical considerations looked at include if the worker wears the business uniform, who provides the workers equipment, how the worker is paid - by the hour or on results, how integrated into the business team the worker is, and if reimbursement of costs are made to the worker.  Generally a contractor would be paid by results, would provide their own equipment and would not be reimbursed costs as this is normally included in the fee they charge.

The fundemental or economic reality test looks at the totality of the relationship to determine how reliant the worker is on the business.  A contractor would not normally be totally reliant on the business for their income, whereas an employee is.  The considerations for this test include payment of GST, does the business pay the workers PAYE, Is the worker receiving the minimum wage, if the worker makes a profit from the work and is the worker able to engage a subcontractor, does the worker answer adds to gain work or do they advertise their services, are invoices given by the worker to the business and is the business the only entity the worker works for.

If the courts decide in favour of an employment relationship, and the business has relied on it being a contractural one, the business could be up for significant costs associated with the backdating and payment of emplopyment entitlements, fines and other orders for costs.

Any business who is unsure of what they should do or where they stand should seek advice advice from a recognised HR advisor or Employment Relations Lawyer.  By recognised I mean someone competent in the HR field - competent being defind as trained, qualified and experienced.  As a general statement, accountants do not have the depth or breath of HR knowledge or experience to lead a client through the HR minefield.

 




OUR COMMENTS:


If you need help sorting out if your working relationships are contractor or employee, then feel free to get in touch.

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OSACO Partners
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Buchanan Painting and Waterblasting
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