Freedom to contract: Whose interests does it serve?

In this article, we examine ACT’s recent policy for worker choice and freedom to contract and the practical implications for workers and employers, as compared to the current legal framework for determining employment status.

The full policy statement can be found here.

Status quo

The law in New Zealand provides a degree of employment rights and protection, but these rights are only provided to ‘employees’. Being an ‘employee’ is essential to access these rights.

Under the ERA, there is a broad meaning of ‘employee’ – “any person of any age employed by an employer to do any work for hire or reward under a contract of service”. This definition serves as a gateway for workers to access the employment rights provided under the Employment Relations Act, Holidays Act, Minimum Wage Act and Wages Protection Act. For example, unless you are an ‘employee’, you will not have the right to a minimum wage, sick leave, annual holidays, public holidays, bereavement leave, or the right to oppose an unjustified dismissal, unless you were able to negotiate for these provisions in your agreement. There is a clear and obvious incentive for a business to engage a worker as a ‘contractor’, instead of an ‘employee’, because the business would have a greater degree of freedom and would not incur the costs and constraints of complying with employment rights and protections.

As it stands, if a contractor believes that they have been misclassified, the ERA allows a worker to challenge their status by taking legal action at the Employment Relations Authority. In practice, there is a broad range of working arrangements in the labour market, and it is not possible to define clearly or precisely the boundaries between an ‘employee’ and a contractor. Under the ERA, when deciding whether a person is an ‘employee’, the courts must “determine the real nature of the relationship” between the parties, and consider all relevant matters, not just the terms of parties’ agreement.

ACT’s policy

Under their policy, ACT would amend the Employment Relations Act so that any worker who has signed up for a contracting arrangement could not challenge their employment status in court.

ACT’s policy is to exclude any person who has agreed to be a contractor from the definition of an ‘employee’ under the ERA, so long as the parties’ agreement meets certain criteria:

• The contract has to be in writing, and specify that the worker is an independent contractor and will not have access to employee rights;
• The worker has to be provided certain information, and given the opportunity to seek advice before entering into the contract;
• The contract does not restrict the worker from performing work or services for other parties (including competitors) or from engaging in any other occupation or work (except during the times when they are engaged in carrying out services under the contract);
• The business does not terminate the worker’s contract for not accepting a specific task.

Commentary

Under ACT’s policy, the definition of an ‘employee’ would be amended, so that the written contract between a business and a worker will define their relationship. As such, a worker who has agreed in writing to be engaged as a ‘contractor’ will be precluded from challenging their contractor status and from accessing employment protection and rights. In short, the law currently decides if a worker is an employee or not. Under ACT’s policy, the contract will determine if a worker is an employee or not.

The ERA recognises that there is an imbalance of power between employers and employees. Employers and employees already have the right to negotiate the terms of their agreement, but in reality, many employees will not have the power to exercise their freedom. In practice, it is the employer that determines most of the contractual terms between the parties.

Under ACT’s policy statement, they have emphasised that technology and online connectivity have created jobs and freelancing opportunities that did not previously exist. That is true. However, the existing employment law framework does provide for a degree of flexibility. The employment market in New Zealand is already made up of a diverse workforce. It is well established that employers may engage an employee solely on a casual basis. That means employers are free to offer work to casual employees as and when the need arises.

The problem with the ERA, as it stands, is that there is a lack of certainty within a grey area. The ERA still relies on a number of common law tests to determine if a worker is an ‘employee’. These tests include assessing the degree of control exercised by the business over the work and the worker, the level of integration of a worker into the business, and the extent to which the worker is in business on their own. These tests require a degree of assessment, and there is no bright line to distinguish between an employee and a contractor, so the outcome is not always clear cut. As a result, an employee may challenge their status as a ‘contractor’. For a business, this provides uncertainty and risks.

While ACT’s policy is described as a remedy for uncertainty and flexibility, it would only achieve this by enabling employers to avoid the need to comply with employment rights and protections, by offering contracts which require workers to accept that they will be contractors (not employees). The objective of the policy is to give the parties the right to choose whether the worker is an employee or a contractor. While workers have the right to negotiate the contract, employers also have the right not to enter into an employment agreement.

If the policy is enacted, it would transform the way that our labour market currently operates, because the legal rights and protections that are accorded to ‘employees’ will only apply if both parties agree that they should. In practice, it means that the party with the greater bargaining strength will decide if a worker is an employee, and if they are entitled to the rights and protection accorded to employees.

We note that under the policy, there is nothing to preclude employers from engaging cleaners and other low-paid employees as contractors, so long as:

• the terms are written clearly into the agreement;
• the worker is given the opportunity to seek advice before entering into the contract; and
• the terms do not preclude the worker from working for other parties.

Concluding comments

ACT’s policy appears to favour employers’ interests over workers’ interests. While the policy may offer greater certainty around a worker’s employment status, it does not seem to address the imbalance of power between employers and workers. In practice, the policy may not reflect “workers’ choice”, but rather the choice of the party with the strongest bargaining position.

If you need any advice or assistance, we encourage you to contact us.