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A decision given in June this year by the new Supreme Court of New Zealand in Bryson v Three Foot Six Limited sheds some light on the important distinction between employment relationships and independent contracts. The previous leading case in the area was TNT Worldwide Express (NZ) Ltd v Cunningham, which recorded what is an independent contract. Bryson v Three Foot Six Limited, while not significantly altering the test for independent contracts records what is not an independent contract. It is not uncommon for employers and workers to want to avoid putting an employment relationship into place. This avoids on the one hand the administrative burden of things such as deducting PAYE and recording annual and sick leave and the risk of personal grievance claims. On the worker’s side it enables the worker to operate their own business and claim deductions against his or her income. Getting this distinction wrong can have a significant impact on an employer’s business. A determination that the relationship is an employment relationship could result in not only personal grievances but also claims for things such as accrued holidays and PAYE not paid by the employer. GST claimed by the employer may also have to be reimbursed to IRD and recovery from an employee may be difficult. The distinction is obviously very important to get right. In the TNT Worldwide Express (NZ) Ltd v Cunningham case, decided by the Court of Appeal in 1993 a lot of emphasis was placed on how the parties recorded their relationship in the contract. It seems clear that this case prompted many employers and workers to describe their contractual relationship as independent contractors. The Employment Relations Act 2000 made a slight change to the area in specifying that the Court must determine the “real nature” of the relationship between the employer and worker. In other words the contractual terms between the parties was not to be considered as decisive in determining whether the relationship was an employment relationship or an independent contract. What precisely this means and how it changes what it has been considered acceptable for many years now was considered by New Zealand Supreme Court in the Bryson v Three Foot Six Limited case. The case concerned Mr Bryson, a model maker engaged by Three Foot Six Limited, a company involved in the Lord of the Rings project. He had signed an agreement describing him as an “independent contractor” or “contractor”. He was engaged in April 2000 and made redundant in August 2001. Mr Bryson made a claim that his dismissal was unjustified, a claim made under the Employment Relations Act and only available to people who are employees. His first hurdle therefore was to show that he was an employee and not an independent contractor. The Employment Relations Act requires that an inquiry into the “real nature” of the relationship is needed into all relevant matters including matters that indicate the intention of the parties. In this case it was decided that Mr Bryson was an employee rather than an independent contractor as stated in his contract because: 1.The contract included a number of features that indicated an employment relationship including that: a.Mr Bryson was very much integrated into the business of the employer and not viewed as operating separately, b.he could not delegate his work, c.he did not bring all necessary skills to the job having had to undergo approximately six weeks training at the commencement of employment, d.he worked effectively full time, he could not be seen as running a business on his own account, taking the profits and risks of a sole trader. e.he was paid an hourly rate and pay continued during “down times” and f.the employer maintained a high level of control over Mr Bryson. 2.The independent contract was presented to Mr Bryson some time after he had been engaged by the employer and it seems that there was no other evidence available to show the common intention of the parties to be independent contractors at that time of the engagement. 3.The practice in the industry was to engage workers under independent contracts. This was due to the work being project based and workers often working for several employers during the course of a year. Although this was the industry practice it was not possible in the particular relationship between Mr Bryson and Three Foot Six Limited to determine that they intended Mr Bryson to work as an independent contractor. Also Mr Bryson had worked for Three Foot Six Limited continuously over a year without having any outside work and where it was common for people in the industry to make considerable investments in their own work equipment, Mr Bryson did not. The test that lawyers, employers and independent contractors considering putting independent contracts into place will need to apply sounds simple. They will need to determine the “real nature” of the contractual relationship. This will include looking at matters such as: 1.The intentions of the parties including: a.written and oral terms of the contract, b.any subsequent deviations or additions to those terms, c.how the relationship operates in practice. 2.Industry practice. 3.How integrated into the employer’s business is the worker and what level of control does the employer have including asking: a.is the worker working full time, b.is the worker working exclusively for the employer, c.can the activities of the worker seen as be standing alone from the employer’s business, d.does the worker bring all necessary skills to the job, e.does the worker supply the worker’s own equipment necessary to do the job, f.can the worker delegate their work to someone else, g.is the worker taking their own risk of profit or loss from the workers activities (if a worker is simply being paid an hourly rate then this will make the worker look less like a sole trader), h.is the worker left to organise their own job or does the employer retain a high level of control over the worker’s activities? It is important to note that none of the above factors for consideration are decisive. It is a matter of standing back and looking at the relationship as a whole. For parties in the contractual relationship it can be hard to “stand back” and look at it objectively. But there are considerable risks involved for employers getting this distinction wrong and we recommend that you do take an objective look at the “real nature” of any independent contracts carefully or take advice if you are unsure.
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