Independent contractor or employee – what is the test?

The distinction between the two categories of workers – employees and independent contractors – has long been fraught with uncertainty. Under the Employment Relations Act 2000 and other related legislation, such as the Minimum Wages Act 1983 and the Holidays Act 2003, employees have minimum employment rights, which independent contractors do not have. This means that employees are entitled to be paid at least the minimum wage, have holiday and leave entitlements, as well as extra rights, such as the ability to take personal grievance claims against their employers. In contrast, independent contractors’ rights and responsibilities are determined by the agreement that they negotiate and enter into with the company for whom they perform services.

The recent Court of Appeal decision, LSG Sky Chefs New Zealand Ltd v Prasad [2018] NZCA 256, is yet another example highlighting the blurred lines between employees and contractors, particularly as innovative ways of working and employment structures become more prevalent. This decision was an appeal from the Employment Court’s decision, which held that two workers (Mr Prasad and Ms Tulai) engaged by the labour-hire company (Solutions Personnel Limited) were employees of the host organisation (LSG Sky Chefs), notwithstanding the two workers having signed a document purporting to be an independent contractor agreement.

The Employment Court, with whom the Court of Appeal agreed, held that while this work arrangement was a “triangular labour hire relationship”, rather than the “traditional bilateral employer-employee model”, the definition of “employee” set out in section 6 of the Employment Relations Act still applied. That the employment structure was convoluted or had many intersecting links in a labour-supply chain did not change the analytical approach as set out in the 2005 Supreme Court decision of Bryson v Three-Foot Six Ltd. This requires the Court to assess whether the worker is in a contract of service with the employer, having regard to all relevant matters. Relevant matters include the written and oral terms of any agreement which often indicate the parties’ intentions, although is not determinative, the way the relationship operates in practice, any features of control and integration (the “control” and “integration” tests), and indications as to whether the worker has been effectively working on their own account (the “fundamental” test).

While the written agreement is the starting point, the courts are required to assess the true relationship between the parties, without being pre-emptively blinded by any labels. Indeed, section 6(3) states that the courts are not to treat as a determining matter any statement by the parties that describe the nature of their relationship. Here, the Court considered the workers’ “independent contractor” agreement to be “out of step” with the real nature of the relationship as it operated in practice and instead, examined evidence showing their relationship. This included evidence of LSG providing the workers with an induction pack and training which they were expected to comply with, a regular stream of work which the workers expected and LSG expected them to be available to perform, and performance management issues being dealt with directly by LSG.

To determine the real nature of the relationship, one needs to examine the employer’s ability to control the worker. This “control test” looks at the extent to which the employer exercises control over the workers such as hours worked and the manner in which the worker performs their duties. Here, LSG exercised a significant degree of direction and control over the workers where it could hardly be expected that either worker could refuse to work their rostered shift. They were also required to wear the same uniforms as LSG employees. This also emphasises the degree of integration of the workers into LSG, this being a test of the extent to which the worker is integrated into the organisation for which they are working. The workers worked alongside LSG employees performing the same duties in the same manner and attending the same meetings. Visually, there was little to distinguish them from the employees, with the only real distinction to be their lower wages.

The assessment does not stop here, however. The “fundamental” test is also used, which involves looking for an entrepreneurial element showing objectively, that the worker is in a business of their own account and bearing a financial risk. The Court here considered that it was “fanciful” to suggest that the workers were in business on their own account, as they did not hold business assets, issue invoices, were exposed to no financial risk nor could they delegate their work.

In short, the inquiry into the nature of the relationship is factual. The relevant matters to be considered all point towards the two workers to be employees. That there is a different employment structure to the traditional bilateral arrangement does not change the test and inquiry mandated by section 6. Indeed, the Employment Court stated, a labour-hire arrangement does not represent an “impenetrable shield” to a claim that the “host” is engaging the worker under a contract of service. Much will still depend on a factual inquiry and analysis of the true nature of the relationship, including the way it operates in practice.  In the end, it is critically important that a principal’s practice in engaging the contractor supports the label given to the arrangement.