Employment Law: Independent contractor or employee?

There have recently been some interesting and potentially far-reaching Employment Court cases on the question of whether a worker is an independent contractor or an employee. David Burton, from Cullen Law, talks us through the details.

Section 6 of the Employment Relations Act 2000 says that the “real nature of the relationship” determines whether a worker is an employee. In considering what the “real nature of the relationship” is, the Court must consider all relevant matters, including any matters that indicate the intention of the person.

This section has had a good workout in recent times, including a finding in July that a builder taken on as a contractor was in fact an employee. In a significant case last year, the Employment Court found that a courier driver had been an employee and was not, as claimed by his employer, Parcel Express, his “own boss”.

Head and Others v Inland Revenue and Madison Recruitment

Another recent Employment Court case has put a further twist on this. Mr Head and seven others challenged their working relationship at Inland Revenue after being placed there by their employer – Madison Recruitment Ltd.

For about the past 12 years, Inland Revenue has used labour hire companies to engage workers on a temporary basis. Such workers are used to manage workflow and customer demand peaks through Inland Revenue’s annual tax cycles.

Inland Revenue awarded a contract to Madison to provide temporary workers for a new business group that would help customers with their tax arrangements and compliance issues.

Several documents were relevant to the arrangement. Madison’s Terms of Engagement with Inland Revenue were approved by the Ministry of Business, Innovation and Employment (MBIE) through the All of Government tendering system. A Master Service Agreement (MSA) was signed between Inland Revenue and Madison. Statements of Work (SoWs) were produced by Inland Revenue that outlined

the scope of assignments to be performed by workers engaged by Madison for Inland Revenue work. Other documents described the way in which people introduced by Madison to Inland Revenue would be managed: Standard Operating Procedures and Managing Madison Employees.

In the course of an engagement, each person would be provided with a proposed individual employment agreement (IEA) where the parties were Madison and the worker, a job brief on Madison letterhead that described the nature of the relationship between the parties and the terms and conditions under which the worker would be employed, a job description prepared by Inland Revenue, and a copy of Inland Revenue’s Code of Conduct.

Triangular arrangements

The Employment Court concluded that, on the face of the documents, there were triangular arrangements between these parties. There was an overarching commercial agreement between Inland Revenue and Madison. Separately, the workers signed documents that acknowledged Madison as their employer. On the basis of the documents, the Court said Madison was the workers’ employer and not Inland Revenue.

The Employment Court then looked at how the relationships worked in practice. Madison recruited workers to meet the requirements of the SoWs. Inland Revenue was not involved in this process or party to the negotiation of IEAs with the workers.

If Inland Revenue wanted workers to work additional hours, it would make that request to Madison and Madison would endeavour to get agreement for that variation with the worker.

The workers did not work with other Inland Revenue teams, but they were supervised by Inland Revenue team leaders. Supervision included maintaining proper workflows and providing technical guidance when needed.

The workers were required to complete timesheets in both Madison’s and Inland Revenue’s time recording systems. Madison would subsequently send timesheet summaries to the relevant Inland Revenue team leader who would either approve or reject the timesheet. Madison would then submit an invoice to Inland Revenue based on the appropriate rates contained in the MSA.

Payment of the workers was made through Madison’s payroll, subject to deductions, such as PAYE. If a worker wanted to take annual leave they were required to make the request directly to Madison.

Standing back, the Employment Court said that the way the relationships worked showed considerable effort was made to respect the difference between Inland Revenue employees and Madison employees who worked at Inland Revenue. The Court concluded that the workers were employees of Madison and not of Inland Revenue.

It is important to note that this case was taken before the provisions of the Employment Relations (Triangular Employment) Amendment Act came into force in 2020. If it had been in force, it is likely that Inland Revenue could be considered a controlling third party.

Possible legislative change?

Further challenges could be that contractors could be given more rights. Workplace Relations and Safety Minister Michael Wood recently announced that a working group has been convened between BusinessNZ, the Council of Trade Unions and MBIE.

The Minister said that the types of workers engaged as contractors vary, from the likes of cleaners, fruit pickers and couriers, at one end of the pay spectrum, to highly paid IT and communications specialists at the other. He said the Government’s concerns lie with those towards the former end of the spectrum.

The outcome of this may include broadening the definition of an employee, extending employment law protections to a range of contractors, putting a burden of proof on employers to show that workers are contractors, and giving some contractors the right to bargain collectively.

Given the Government’s clear majority in Parliament, it certainly has the ability to change this area of employment law further.

David Burton is the Director of Cullen – The Employment Law Firm. David has over 30 years of employment law experience in New Zealand and overseas. His expertise is recognised by his peers.