One word makes a big difference
In the news recently there has been a lot of coverage of courier drivers, and whether they are employees or contractors. Knowing the difference between what constitutes an employee and a contractor is crucial to understanding your responsibilities as a business owner. Incorrectly labeling someone working for you can result in expensive consequences.
Employee vs Contractor: What is the difference?
An employee is someone who:
- Signs employment agreements;
- Receives a salary or wage in return for their work;
- Is entitled to all minimum employment rights such as minimum wage, holiday and leave entitlements; and
- Is entitled to bring personal grievances.
As an employer, you must keep records such as employment agreements, wages, time sheets and holiday and leave records for an employee.
Contractors are treated differently under employment law. They:
- Are generally self-employed and earn their income by invoicing for the goods and services they provide;
- Pay their own taxes and ACC levies;
- Are not covered by most employment related laws. This means no annual or sick leave and no ability to bring personal grievances; and
- Tend to have greater flexibility around their work hours and pay rates.
Is The Person Working For You An Employee Or A Contractor?
The Employment Relations Act 2000 defines what it means to be an employee in New Zealand. The Act also sets out that you must look at the ‘real nature of the relationship’ between you, as the employer, and the person working for you. In deciding this, you must consider all relevant matters.
There are a number of tests which help determine the real nature of the relationship.
These tests are:
- Intention test. What do the parties intend the nature of the relationship to be?
- Control vs Independence test. How much control does the employer exercise over the worker’s content, hours and methods?
- Integration Test – is the work performed fundamental to the employer’s business?
- Fundamental/economic reality test. Is the worker operating a business in their own right?
You must apply all the tests to get an accurate answer about the real nature of the relationship.
The emphasis is on the real or actual nature of the relationship, and not the labels that the parties are calling it. A worker may be labelled a contractor, but the real nature of their relationship may reveal them to be an employee, as seems to be the case with courier drivers
Risks For An Employer Incorrectly Labeling Someone
Incorrectly labeling someone as a contractor when they are actually an employee can lead to expensive consequences.
In Paalvast v Elmstone, a woman who worked at a furniture staging firm was incorrectly labelled a contractor by her employer but it was determined by the Employment Relations Authority that she was actually an employee. As an employee, she had to right to raise a personal grievance and claim for owed holiday pay. Her employer was found liable for both and faced expensive consequences. The Employment Relations Authority ordered Elmstone, the employer, to pay Ms Paalvast $6760 in lost wages, $6000 compensation for humiliation, $208 in holiday pay and $2500 contribution to costs.
In other situations, an employer may also be liable for:
- Unpaid PAYE tax;
- Unpaid minimum wages; and
- Potential penalties from Inland Revenue or the Employment Relations Authority.
At Godfreys Law, our employment law experts can help you navigate the important differences between contractors and employees. Contact Godfreys Law today to speak to our Employment team, to make sure your business is protected.
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