Are your contractors really employees?

We presented on the employee/contractor issue in a recent webinar and at conference, delivering the crucial but controversial message that businesses in the building and construction industry need to look closely at their contracting arrangements and consider whether these are fit for purpose, to manage the risk that contractors could successfully argue they are actually employees.

Despite the fact that the building and construction industry has traditionally predominantly operated on contractor arrangements, a number of cases in the Employment Court recently have held that workers engaged as contractors are really employees. This includes a 2021 decision, Barry v CI Builders Limited, which held Mr Barry, a building subcontractor who had been working in this role for three years, was actually an employee.

In summary, the Court found that Mr Barry was not operating a business on his own account but was providing a service to the company and working for it, and its interests, including because he:

• worked under the strict direction and control of the company;

• had no flexibility in terms of his work patterns;

• was integrated into the company’s operations;

• was unable to work for others as he worked 40 hours each week full-time and had little time or energy to work for others;

• did not accrue business goodwill as he didn’t deal with suppliers and customers directly; and

• did not invoice the company which was unlike others who did contract work for the company.

Where a worker successfully challenges their employment status, they then have access to all employee related entitlements including sick and other kinds of leave, holiday pay, minimum wage payments, for up to six years which is the claim limitation period, and personal grievance claim rights. Penalties may also apply.

The line of cases finding workers are really employees includes taxi drivers and the courier industry, dominated by owner/ driver arrangements. The most recent case held Uber drivers are employees, with that decision being challenged in the Court of Appeal.

In addition, the Government is reviewing contractor relationships, with a view to setting minimum entitlements for these, as happens with employment relationships. Aside from the risk of employment claims, the Inland Revenue Department may determine that a contractor is working as an employee and that their income should have been taxed accordingly. Penalties may apply here too.

What this means is that all businesses using contractor and subcontractor arrangements should review these to make sure, as far as possible, they’re not next in line for a legal challenge.

What are the key differences between employees and contractors?

Employees have minimum employment rights and entitlements under employment laws such as the Employment Relations Act 2000, Minimum Wage Act 1983, and the Holidays Act 2003. These laws entitle employees to minimum employment entitlements, including being paid at least the minimum wage, receiving holiday and leave entitlements, and require employees to have a written employment agreement.

A contractor has no rights or entitlement under employment laws. This means that they will not be entitled to annual holidays or sick leave and do not have the ability to bring a personal grievance against.

Both employees and contractors have rights and responsibilities under health and safety laws, and there have been a number of WorkSafe prosecutions recently finding that contractors must be protected and informed of health and safety risks in the same way as employees on multi-PCBU sites.

Where a contracting agreement is challenged, the ‘real nature of the relationship’ will be determined by the Court, taking into account what the agreement says, and the legal tests to determine the parties’ intention, degree of control over the worker, their integration to the business, and the fundamental or economic reality of the arrangement.

Legal Tests Intention

The Court examines the written agreement and any other relevant information to determine the parties’ intention for their relationship when it started, that is, whether this was to be an employeeemployer or contractor.

Control

The Court examines the degree of control the principal has over the worker’s hours, availability, and supervision. Contractors would have autonomy in how they undertake their duties

Integration

The integration test examines how the worker is integrated into the work environment or business, for example, are they:

• ‘Part and parcel’ of the company;

• Using their own equipment and tools?

• Required to attend company events?

• Paid on delivering results/completing work or by a set payment per work period?

• Reimbursed for work related expenses?

Fundamental/economic test

This test explores whether the worker is in business for themselves, by looking at who has benefited economically from the relationship.

Factors for consideration

The Court’s consideration includes the following factors:

• Who controls the way the work is performed, so far as there is a scope for that control?

• Is the worker integrated into the company?

• Is the worker required to wear a uniform and/or display material that associates them with the company?

• Does the worker supply and maintain any tools or equipment?

• Is the worker paid according to task completion, rather than receiving payment based on time worked?

• Does the worker provide an invoice for payment?

• Does the worker bear any risk of loss, or conversely have any chance of making a profit from the job?

• Is the worker free to work for others and do they really have a chance to do this?

• Can the worker subcontract the work or delegate performance to others?

• Is tax deducted from the workers’ pay on payment?

• Who provides the tools and equipment?

• Does any business goodwill accrue, and to who?

• Does the worker receive paid holidays or sick leave?

• Can the worker set their own hours and take leave when they want to?

Safely using contractors

To make sure your contractor arrangements meet the tests above, we recommend you:

• Consider the tests and how they fit with your needs – if they don’t fit, consider moving to an employment agreement

• Use the right agreement

• Allow contractors to work for other people and be careful not to have contractors working full time on an ongoing basis so that they really have the opportunity to do this

• Let the contractor determine their hours of work – not you

• Get the contractor to invoice you once a job is completed

• Be clear that the contractor does not receive any entitlements under the Employment Relations Act 2000 or Holidays Act 2003, e.g. sick leave, annual leave

• Ensure the contractor uses their own tools, vehicles, materials etc.

• Engage contractors through their company not as individuals

• Allow the contractor to delegate work to its employees/ contractors

What does this mean for employers?

The case examples above highlight that there are risks with engaging someone as an independent contractor in that the nature of the relationship can be challenged regardless of what the agreement says.

If a contractor succeeds in arguing they are an employee, they become entitled to minimum employment rights including potentially significant backpay for leave and holidays.

Building and construction employers are well advised to review their contractual arrangements and make sure these fit the relationships they have with workers, so that they can stand up to challenge.

Please contact us on 0800 354 821, if you would like us to review the contracts and agreements you currently have or intend to offer.