Due Process a column by Geoff Hardy
What type of contractor are you? There is often confusion about the difference between an independent contractor, a labour-only contractor, and a subcontractor, and consequently some doubt as to which contract to use in any given case. This article explains the difference and provides some guidance on the issue.
Geoff Hardy has 45 years’ experience as a commercial lawyer and is a partner in the Auckland firm “Martelli McKegg”. He guarantees personal attention to new clients at competitive rates. His phone number is (09) 379 0700 and email geoff@ martellimckegg.co.nz.
This article is not intended to be relied upon as legal advice.
Independent Contractors These are people who would normally be your employees, but for the fact that one or both of you prefer that they be treated as independent contractors instead. There are certain advantages and disadvantages for both parties in doing so. The main advantages for the independent contractor is that they can generally charge a higher rate, they pay income tax four times a year rather than PAYE out of every pay packet, and they can deduct certain expenses from their income for tax purposes. The main advantages for you the joinery business owner is that they are not covered by employment law so they are not entitled to be paid when they are on leave and they don’t enjoy the normal protections against dismissal and unfair treatment. From the independent contractor’s perspective the main disadvantages are that they have to prepare financial statements, file GST and income tax returns, and pay their tax when the time comes, and they aren’t entitled to all the protections that employment law would otherwise give them. The main disadvantages from the joinery business owner’s point of view is that independent contractors are supposed to have a greater degree of freedom than employees do, in terms of how and when they carry out their work.
JOINERS Magazine September 2021 page 86
Independent contractors typically only work on your projects and under your supervision, just as your employees do. So they are effectively your staff members. However it is important not to treat them in exactly the same way as your employees, because if they are employees in reality, then the law will treat them as employees regardless of what label you put on the relationship. That means in the event of a falling-out between the two of you, the independent contractor may claim that he was in fact an employee, and insist on all the paid leave and protections that he was entitled to, right back to the day he started. There are certain tests that tax law and employment law use to differentiate between true employees and true independent contractors, and it pays to get some professional guidance on those tests so you don’t stray across the line. Using a formal independent contractor agreement certainly helps to achieve that, but it may not be enough to get you home. Labour-Only Contractors These are tradespeople who genuinely are the bosses of their own businesses and work directly for arms-length clients, rather than independent contractors who have all their work fed to them by one “boss” and who very rarely deal with the clients direct. Typically labour-only contractors work for many different clients over their careers, although they may do repeat work for certain clients and in some cases may get all their work from one or more developers or volume building companies. So they tend to be the more mature tradespeople who have served their time and have “gone out on their own”, but at the same time they either don’t want, or aren’t given, the responsibility
for managing the project. That means that they usually don’t engage the subcontractors or procure the building materials, and they are just one of a number of skilled tradespeople working on the project under the direction of the project manager – whether that is the property owner, or the volume building company which has contracted with the property owner. Consequently, the labour-only contractor is generally given much more autonomy and freedom than an independent contractor, consistent with his greater knowledge and experience. He is one step closer to the true head contractor, in that he is largely left to his own devices to carry out the work as he sees fit, rather than being closely supervised by the project manager. His primary responsibility is to provide skilled labour in his specialist area of expertise, using the building materials supplied to him by the building manager. Of course there are always exceptions to the rule, in that some labour–only contractors are expected to procure some of the building materials and occasionally engage some of the specialist trades. In fact on residential projects where the property owners have taken it upon themselves to manage the project, but clearly don’t have the expertise to do so, the labouronly contractor may end up as the unpaid project manager by default. The important point is that there is no clear delineation between an independent contractor and a labour-only contractor, and there will always be some overlap between them. A labour-only contractor is somewhere between an independent contractor and a head contractor, and the main factors to look out for are that he
