Manage independent contractors the right way

Engaging with independent contractors may be a good option for some businesses desperate for workers and battling against New Zealand’s shortages of skilled workers.

One of the drivers was the difficulty in getting overseas workers the right to work in New Zealand, including visa holders. There were also hold-ups in the hunt for overseas residents to be allowed to work in New Zealand.

For businesses who want workers quickly, but want to be resilient and not tied-down financially when things take a turn and staff become costly, independent contractors may be the solution – so long as business owners understand the potential pitfalls.

Independent contractor: the definition

An independent contractor is a person hiring out their expertise (as an individual or as a business) to another individual or business, but not as an employee. There is no exclusivity of the relationship and no expectation of permanent commitment. They are usually also generally free to deliver the results how they want, using the tools they want and even using the people they want, as long as the result meets the expectations and deadlines of the agreement. For many contractors, there is generally a time-based component (either in how they’re paid or in how they’re managed), which is where things become confusing.

Benefits of this model begin firstly with the open-ended fixed expense of a long-term employment relationship being done away with. It can be simply cheaper, in many set-ups. Contractors are generally hired for expertise over a short period of time, for a known cost, and they lie outside employment laws surrounding the provision of workplace benefits and the termination of contracts.

However, one issue is that because contractors lose the strong protection of the employment laws, the Government is very focussed on ensuring that businesses don’t classify employees as contractors, to get around the protections and the ongoing costs.

It doesn’t only happen deliberately, which is unfortunate for some unsuspecting employers; they can sometimes appoint a contractor in good faith but without clearly defined relationship boundaries. Then a business’s treatment of their contractors can result in them later on being regarded as employees. This usually only becomes apparent when the business terminates the contractor, who believes they should have been an employee all along and challenges the termination. It can also happen if a contractor discovers and feels aggrieved at not receiving some benefits that others might be receiving.

Employees have a number of benefits and protections which contactors don’t have, including:

1. Protection against dismissal/loss of work except for certain well-defined reasons.
2. Entitled to be managed in accordance with very well-defined good faith processes and principles and with rights that afford some protection.
3. Entitlement to communications and information that help you participate in employee life.
4. Access to certain paid benefits, like annual leave, sick leave, and bereavement leave.

Can my business terminate an independent contractor freely and easily?

An independent contractor’s contract has a termination clause, and a business can use it in good faith. But then if this is challenged, the law might say you should have terminated them as if they were an employee because, in hindsight, they WERE an employee. Here are the consequences you’re risking:

1. You will pay an amount of damages for breaching the law.
2. You will perhaps compensate an amount for humiliation and embarrassment.
3. Perhaps you might even have to reinstate that person to employee status!
4. You will likely also have to backpay all the benefits an employee should have received that the contractor did not receive, such as annual leave, sick leave etc., that can be a very unexpected cost.

Is there a way by which I can ensure an independent contractor relationship never becomes employment?

There are four (simultaneously applied) tests that have become standard in determining whether a person is an employee or an independent contractor. In a summarised form they are:

1. Intention test
   • What does the contractual document intend through its words?
   • What benefits does the contractor receive, or not receive?
2. Control test
   • Can the contractor work whenever they want, wherever they want to achieve the outcome?
   • Can the contractor organise their own delivery using whatever tools they want, and whoever they want to achieve the outcome?
3. Integration test
   • Is what the contractor is doing, integral to the business and are they integrated into the team of the business through meetings, events, communications, uniform, equipment/PPE issue etc?
   • Is the contractor paid by the hour as if on payroll, or for results (services rendered) and reimbursed for expenses?
4. Economic reality test
   • Is the contractor paid a wage or a fee?
   • Does the contractor pay their own tax, GST, ACC; and issue invoices for their work?
   • Can the contractor work for multiple businesses and can they make a profit or suffer loss?

Answering these basic questions and a few deeper nuances can give an employer confidence that they are contracting with a person in the correct way. Specifically, if the relationship is tested, then the relationship will be exactly what they expected or intended it to be, and they will avoid the financial consequences of an error.

If this article has raised any questions or concerns or you’d like to learn more about how we can help your business, please reach out to our workplace relations experts via our 24/7 HR Advice Line.