When deciding whether a worker is an independent contractor or an employee, business owners need to be aware of more than just the terms of the contractual agreement. Whether a worker is an independent contractor or employee depends on three central matters:

• the intention of the parties

• the contractual terms

• the conduct of both parties

Why is this a problem?

There are two main issues for an employer, which can result from either the IRD or the Courts holding that a contractor is for all intents and purposes, an employee:

The tax consequences for an employer include liability for past holiday pay and sick leave, along with back paying the employee’s PAYE;

A business owner may find themselves faced with a personal grievance. While a contractual agreement with an independent contractor can be terminated very simply, if that contractor is later held to be an employee, the employer will be under fire for not having abided by the employer obligations for dismissal. A personal grievance can result in hefty reparation for lost wages and compensation for the hurt and humiliation a worker may have suffered.

Differences between an employee and a contractor

An independent contractor differs from an employee primarily in that they are not paid a wage by the business owner, but instead are GST registered, file their own tax returns and ACC levies, and carry independent responsibility for their business losses and overall function as an independent business. Contractors may work for more than one entity and they may also employ people in their own right. Contractors will usually enjoy the freedom of taking holidays when they like and choosing when and where they will work. However the downsides that come with this status is that an independent contractor will miss out on the duties employers owe to their employees, such as the right to be paid holiday leave, sick leave and bereavement leave. A contractor is also restricted from bringing a personal grievance against their boss for unjust conduct.

When can the lines become blurred?

Despite the numerous differences, the line between the two can often become blurred. A useful test business owners can use is to look at the measure of control they have over a worker. The more control they have, the more likely the worker is an employee rather than a contractor. If a business owner requires a contractor to be at a certain location for work during set hours, if they are told when to have breaks and when to lunch, if they are required to attend meetings and trainings and if they are performing a service integral to your business, then they may have inadvertently become an employee.

To prevent a situation where an independent contractor who works for you is later found to have the status of an employee, it is important to firstly know the difference, and secondly to ensure the relationship does not transform over time to something neither party intended. Even though the parties may have intended to have a relationship of business owner and independent contractor and they may have a written contract to that effect, if conduct becomes akin to that of an employer and employee then it is time to reassess the contractor’s relationship to your business and consider whether their work status needs to change.

This post was published in the FMCG Business magazine.