Contractor Agreements & Employment Contracts – What’s The Difference?

Contractor Agreements & Employment Contracts – What’s The Difference?

More frequently, employers are engaging people to work under independent contractor agreements rather than employment contracts. The employer and contractor relationship is wholly different from the employer and employee relationship, and each carries different benefits and detriments for the parties.

In an employer and independent contractor relationship, the parties cannot rely on the Employment Relations Act, as the Act does not apply to contractors. This becomes problematic, as the relationship between contractor and employer may operate and appear to be like an employee and employer relationship yet is governed by entirely different law.

Some employers accidentally classify employees as contractors without realising the consequences of this action. However, other employers deliberately do this in an attempt to avoid their responsibility for employee entitlements. Employers may see this relationship as more desirable, as independent contractors are not entitled to annual, sick leave or holiday pay. As well as this, independent contractors cannot bring personal grievances. Importantly, a contractor can be terminated subject to the specific terms of his or her contract, whereas an employee can only be terminated if that termination can be procedurally and substantively justified.

Section 6 of the Employment Relations Act provides a definition for who is an ‘employee’. This section sets out the approach that the Court or Authority is to determine whether an individual is engaged as a contractor or an employee. The Authority must consider the “real nature of the relationship between them”, which is done through a balancing exercise. Case law has developed four core tests to assist in this balancing test.

1. Intention test

What the parties intended the relationship to be is relevant, but it doesn’t on its own determine the true nature of their relationship. Intention is usually deduced from the wording in the parties’ written agreement.

2. Control vs independence test

The Court will consider how much control is exercised over the worker’s work content, hours and methods. The greater the control, the more likely it is that a person is an employee. A worker with greater freedom to choose who to work for, and where and when to work, is more likely to be a contractor.

3. Integration test

This test looks at whether the work performed by the person is fundamental to the employer’s business and whether they are ‘part and parcel’ of the organisation. Usually, the work performed by a contractor is only a supplementary part of the business and is not the type of business commonly done by employees.

4. Fundamental/economic reality test

This test is concerned with whether the alleged employee engaged themselves to perform the services with the employer as a person in business on their own account.

The Court and Authority have a great deal of discretion in this area, and this allows them to interpret the tests as they see fit. In theory, the tests outlined above appear to be a fair and equal balancing test. However, case law and Authority rulings have proven that this is not so. Despite the Koia v Carlyon Holding Ltd ruling that the intention test is not determinative, the Authority gives large weighting to the contractual relationship. This is problematic, because it fails to adequately address the intention of the worker. More often than not, a layperson presented with a contract for services will sign the document without considering the legal implications of the relationship. Furthermore, the person being offered the work is generally not in a position to negotiate the contract. They may be desperate for work, unaware of the difference between contractor and employee, and keen to sign whatever is put in front of them. This allows employers to take advantage of workers and face no repercussions.

Certain industries are particularly notorious for hiring workers under contractor agreements rather than employment contracts. The IT industry has become overrun with contracting agreements, to the extent that case law has stated that the IT industry generally uses contracting agreements over employment contracts. This was stated in Goode v Turnstone Technologies Ltd, which demonstrated the dangers of a contracting agreement. The employer in question in this case ceased trading, and Goode claimed six months’ wages and a car allowance in response to his constructive dismissal. The company claimed that Goode was a contractor, rather than an employee, and so they did not have to pay these wages. The Authority found for the company on the grounds that Goode had signed an agreement specifying him as a contractor. This provides a classic example of the Authority exercising its discretion by placing particular weight on the intentions of the parties, rather than considering the policy behind the decision, and the best interests of both parties.

The common law has arguably failed to adequately recognise and protect the power imbalance between employer and employee, which is why legislation is necessary. The Employment Relations Act 2000 is social legislation at its heart, which exists to address this power imbalance. However, the current state and application of the Act fails to serve this purpose and is leaving workers vulnerable. The inapplicability of the Act to contractors leaves a large and growing number of individuals unprotected.

Speak to our employment lawyers in Wellington for more information about the difference between contractor agreements and employment contracts.

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