What you need to know about the Government’s new contractor classification law.
Late last night, the government announced significant changes to our Employment Relations Act that will clarify how workers are classified as either independent contractors or employees. As business leaders, you’ll need to prepare for these changes, which could impact your workforce management and employment relationships, especially if you regularly engage contractors.
Businesses have expressed varying reactions to these changes. Advocacy groups such as the Employers and Manufacturers Association and BusinessNZ have welcomed the new test, citing that it will reduce uncertainty and foster innovative business models that rely on short-term contractor arrangements. However, not everyone is on board. The Green Party has criticised the changes, arguing that they strip away important rights from contractors, many of whom are already in precarious work situations. Their concerns are rooted in the belief that businesses may use these laws to avoid paying for sick leave, holiday pay, and other employment entitlements by misclassifying workers as contractors.
This raises a critical point for business leaders—while these changes may offer clarity, it’s essential to avoid any practices that could be seen as exploiting contractor status to reduce costs. The line between flexibility and fair treatment needs to be carefully managed.
The Four Criteria for Contractors
The new law introduces a clear four-part test, which businesses must use when establishing whether a worker is a contractor. A worker will only be considered an independent contractor if ALL four of the following conditions are met:
A written agreement confirming their contractor status: Businesses will need to ensure that all contractor agreements explicitly state that the individual is an independent contractor. This means that a verbal understanding won’t be enough; formal written agreements will be necessary. Failing to clearly outline the contractor arrangement could open the door to claims in the Authority or Employment Court.
Freedom to work for other businesses, including competitors: A key part of the contractor model is flexibility. Businesses cannot restrict their contractors from working for other companies or even for their direct competitors. This will be a crucial aspect for business owners to manage, as it may require a shift in how you structure your contractor agreements and protect your commercial interests.
Flexibility in work hours or subcontracting: The new rules prohibit businesses from mandating specific hours for contractors or requiring them to work a minimum number of hours. Contractors must also have the freedom to subcontract their work if needed. This will affect how you plan your workflows, so it’s important to build more flexibility into your operations when engaging contractors.
No penalty for declining additional tasks: Contractors will now have the right to refuse additional work without facing consequences like contract termination. This can impact how you allocate work, especially for short-term projects or fluctuating workloads.
If these criteria are met, the worker will be considered a contractor. However, if one or more of the criteria is not met, the existing legal test for employee status will apply, which includes evaluating the nature of the working relationship beyond the contractual agreement.
What Does This Mean for Business Owners?
From a business perspective, this change is significant for several reasons:
More certainty and reduced legal risk:
One of the key drivers behind these changes is to give businesses more certainty when classifying workers. Currently, challenges to worker status through the courts are costly and can cause significant operational disruptions. This new test intends to provide businesses with a clearer framework, reducing the ambiguity around contractor status and the risk of legal disputes.
This is particularly important for businesses that rely heavily on contract labour, such as those in the tech, gig economy, and professional services sectors. The changes will likely be welcomed by businesses using digital platforms to contract workers—where uncertainty has been a growing concern, especially following recent legal challenges such as the Uber case, where certain drivers were classified as employees only during specific times.
Impact on Contractor relationships:
While these changes will provide clarity, they also require businesses to rethink how they structure relationships with contractors. If your business is used to setting hours or exerting control over your contractors’ work, these practices will need to change.
You may need to adjust your contractor agreements to ensure they meet the new criteria, which could involve providing more freedom and autonomy to your contractors. In industries where control over work quality and availability is critical, this could present new challenges in managing your workforce.
Protecting your business interests:
Allowing contractors to work for competitors may raise concerns, especially in industries where intellectual property or proprietary methods are involved. You will need to think carefully about how to balance these new legal requirements with the need to protect your business interests. Non-compete clauses will no longer be enforceable for contractors under these rules, so you may need to explore other ways to safeguard sensitive information.
You’ll also need to ensure that your contracts are watertight when it comes to confidentiality and other critical protections, as the increased flexibility afforded to contractors may expose your business to additional risks.
How should business owners respond?
While the government’s goal is to provide clarity, the new law also introduces a level of complexity that business owners and senior managers must navigate. Here are some steps to consider:
Review and update contractor agreements:
Now is the time to review any existing contractor agreements to ensure they align with the new legal framework. Make sure all four criteria are clearly addressed in your contracts. In addition, ensure that contractors have the freedom to accept or decline work, set their hours, and subcontract if needed.
You may also need to rewrite agreements to remove any restrictive clauses that might inadvertently treat contractors as employees, which could lead to legal challenges down the line.
Re-evaluate workforce planning
With contractors being granted more autonomy, you’ll need to re-think how you plan and allocate work. If your business is highly dependent on a contract-based workforce, it might be worth re-evaluating how you manage your staffing needs, especially during peak periods.
Consider whether you may need to employ more permanent staff for roles where predictability and control over hours are essential.
Stay informed on compliance
Compliance is always a moving target, and keeping abreast of the law is essential. This change is expected to take effect in 2025, but that doesn’t mean you should wait to make adjustments. Begin incorporating these changes into your contracting practices as soon as possible.
Preparing for the Future
In the coming months, we expect more discussions and updates on how this law will be implemented, but one thing is clear: businesses will need to adjust their practices to comply with the new rules. Start now by reviewing your contractor relationships and contracts, and keep communication channels open with your workers.
At Yellow, we’re here to support you through these changes. If you need help understanding how this legislation applies to your business or want assistance updating your employment agreements, get in touch with us. We’ll work with you to ensure that you’re compliant and ready for 2025, while continuing to meet your business needs.
Disclaimer This article, and any information contained on our website is necessarily brief and general in nature, and should not be substituted for professional advice. You should always seek professional advice before taking any action in relation to the matters addressed.
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