Employment status and contracting relationships

Contractors, employees, and the grey area in between

It would appear that this remains a hot topic and given in recent developments in case law, the classification of workers as either employees or independent contractors continues to be under increasing scrutiny. A number of cases have highlighted the complexities of this issue, and the implications for businesses are significant, particularly as changes to the law may be on the horizon.

As discussed in a previous blog, the Court of Appeal’s ruling in Rasier Operations BV v E Tū Inc. set a precedent for gig economy workers, determining that some Uber drivers are employees rather than independent contractors. This decision focused on the true nature of the working relationship, considering factors like control, intention, and integration into the company. While this ruling is still under appeal, it signals that businesses relying on flexible work arrangements should be prepared for potential changes in the legal landscape.

A more recent decision in the Employment Relations Authority (Carey v Smith) has followed the principles established in the Rasier case, applying the same broad test to determine whether an individual is an employee or a contractor. In this case, Mr. Carey raised claims of unjustified dismissal against a number of parties, arguing that he was an employee. The respondents, on the other hand, claimed he was a contractor working towards potential shareholding in a start-up company.

The Employment Relations Authority looked at several key factors to determine Mr. Carey’s status under the Employment Relations Act 2000.

These included:

• Intention - The Authority considered informal discussions about Mr. Carey receiving a salary and shares in the company but found the intentions of the parties were neutral and did not definitively indicate an employer-employee relationship.

• Control and Integration - Despite some involvement in promotional activities, the Authority concluded that the evidence did not support Mr. Carey working under the direct control of the respondents or being sufficiently integrated into the company’s operations.

• Working on His Own Account - The Authority also found insufficient evidence to show Mr. Carey was working on his own account, concluding it was more likely that he was working towards becoming a shareholder rather than operating independently as a contractor.

This case highlights the importance of understanding that the line between employee and contractor can be blurred, particularly in informal or evolving business relationships.

Employers should carefully assess the true nature of their working relationships, beyond the written agreements, to avoid misclassification risks.

As we have previously advised, Minister Brooke van Velden has proposed an amendment to the Employment Relations Act, introducing a "gateway test" for determining employment status. This test will consist of four criteria that, if met, would classify the worker as a contractor. While we await more details on this amendment, it’s crucial for employers to monitor developments and ensure their contracts and working arrangements align with the new legislation.

Key Takeaways for Employers:

1. Review employment status regularly - be proactive in evaluating whether your workers are employees or contractors. Consideration of factors like control, integration, and intention is key. Formal contracts should align with the actual working relationship.

2. Prepare for changes in the law - stay informed about the upcoming changes to employment status classification. The proposed "gateway test" may significantly affect how contractors are treated legally, so updating contracts and policies ahead of time will help mitigate risks.

3. Don’t rely on informal agreements alone - as demonstrated in Carey v Smith, informal agreements and verbal understandings can lead to confusion and misclassification. Ensure that any arrangements are clearly defined, documented, and consistent with the nature of the work.

4. Understand the risks of misclassification - misclassifying workers as independent contractors when they should be employees can lead to significant legal and financial consequences, including claims for unpaid entitlements (PAYE etc.) and potential fines.

The landscape for employment relationships continues to evolve, particularly as gig economy workers gain more legal recognition as employees. It’s essential for businesses to stay on top of case law and proposed legislative changes. By carefully assessing the nature of your working relationships and staying ahead of regulatory changes, you can ensure your business remains compliant and mitigate potential risks.

For more guidance on navigating employment classifications or any other employment law matters, don’t hesitate to reach out to Yellow Consulting. We’re here to help you stay informed and make the right decisions for your business.

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.