LOOKING TO HIRE STAFF AND TEMPTED TO ENGAGE THE SERVICES OF A CONTRACTOR? JO DOUGLAS OUTLINES YOUR OBLIGATIONS UNDER CURRENT EMPLOYMENT LEGISLATION, AND THE POTENTIAL CHANGES ON THE HORIZON.
I find that in advising smaller businesses there is a real drive towards finding flexible options for employing or engaging staff. It is not always easy to find the right solution, because the law provides essentially a presumption that staff will be engaged as permanent employees with ongoing and regular employment.
Permanent employees have better job security, access to benefits such as paid holidays and the like.
Yet for small businesses in particular, it may be quite a commitment to bring on a full-time permanent employee and you may therefore look to other options.
It is tempting to think that you will save money if you engage a contractor on a part-time basis. However, in the long run this may be a costly mistake, particularly if that individual will be working as an integral part of your business.
The Employment Relations Authority and Employment Court has broad powers to determine that a worker has been working as an employee and to order back-pay for entitlements that the individual has missed out on. We comment on this further below.
As a rule of thumb, contracting arrangements should only be used for true service providers operating a business on their own account. If you need to do all the set-up for the worker to get them started as a contractor and they do not appear to understand the arrangement or the implications, then you are likely to be entering a high risk situation.
The flip side is that for well-informed individuals with specialised skills, there may be advantages (including tax advantages to them) in setting up as a contractor, particularly if they can apply their skills and experience to work for a number of clients and not just you.
In this case we would recommend that you document carefully the arrangement, and that the arrangement provides fair remuneration for the services being provided.
Going forward, making the right call on these arrangements is going to be even more critical, as the Government is currently considering strengthening protections for contractors.
The law already provides in section 6 of the Employment Relations Act for the Authority or Court to determine the real nature of a relationship.
The Authority or Court will consider matters such as:
• The extent to which the individual was under the direction and control of the alleged employer. For example, was the individual able to set their own hours of work, or were these determined by the other party? Did the individual have some discretion as to where and how they performed their role?
• Whether the individual was integrated into the business. For example, were they held out as an integral part of the business, such as through the provision of an email address associated with business, business cards and/or a branded vehicle? Would an objective observer conclude they were part of the enterprise or separate?
• Was the individual in business on his or her own account? Do they work for multiple clients or just you? Will they profit from their endeavours? Where an individual has incorporated a company and uses that as the contracting party, this will typically be considered a factor favouring a principal and contractor relationship rather than employer-employee. In addition, payment and taxation arrangements may be relevant.
If an employee obtains a declaration from the Employment Relations Authority that they were an employee, the potential implications would include the employee being able to access the personal grievance procedures and pursue a claim for entitlements arising out of an employment relationship, such as holiday pay.
The Government has released a discussion paper putting forward 11 options to further deter what is perceived to be the misclassification of employees as contractors and make it easier for workers to access a determination on their employment status.
They are also looking for feedback on possible changes to the definition of who is an employee under New Zealand law and options to increase protections for contractors without making them employees. Consultation closes on the 14th of February.
This is a potentially significant issue as there are believed to be 140,000 self-employed contractors in New Zealand, which is more than five percent of the total working population.
In addition, it is estimated that providing minimum employment entitlements to contractors would add 13 percent and 20 percent to the cost of each worker. This means the changes under discussion could add a significant cost to
New Zealand businesses.
Given this, we believe there will be a high level of consultation with the industry before any changes are introduced.
JO DOUGLAS IS A PARTNER AT DOUGLAS ERICKSON, EMPLOYMENT LAWYERS.
Email: jo@douglaserickson.co.nz
This article is written for the purposes of providing general information only and is not intended to be legal advice.
