Employers can find it difficult to choose employees vs independent contractors.
The rights and responsibilities for employees and independent contractors tend to differ drastically. As a business, it is important to know if your worker is an employee or independent contractor as employment law applies to employees whereas commercial law applies to contractors.
Employees vs Independent Contractors
Employee
The definition of an employee is any person of any age employed by an employer to do any work for hire or reward under a contract of service. An employee is covered by an employment agreement, which should outline the basic entitlements available to the employee. The employee will normally be advised in the agreement of their pay, holiday entitlements, arrangements for sick leave, among other aspects.
In respect of record keeping obligations, it is also important to note that employers are required to maintain employee records. Employee records need to be accurate and kept for a period of 6 years, whereas employers do not need to keep employment records for independent contractors.
Independent Contractor
Compared to an employee, an independent contractor is often self-employed and will be engaged specifically for reasons outlined in a contract. The contract, sometimes referred to as an independent contractor agreement, is different to an employment agreement and will therefore not outline the same information, such as leave entitlements and arrangements for holidays.
Regardless of the worker being an employee or an independent contractor, it is important to note that employers have health and safety obligations to both parties and must comply with the Human Rights Act when dealing with both contractors and employees.
Testing if a worker is an employee or independent contractor
There are a number of tests that are applied by the Employment Relations Authority or the Court, to determine the true nature of the relationship between a business and a worker, irrespective of what the worker is called or labelled in an agreement.
Typically, they will apply the leading case law which currently helps employers distinguish between an employee and a contractor. These tests are as follows:
- Intention test – for example, what was the intention of the parties? Was the contract offered on a “take it or leave it” basis or were the parties able to negotiate the terms?
- Control vs independence test – for example, how much autonomy or control does the worker have? Can they regulate how and when they perform the work?
- Integration test – for example, how integrated is the worker into the business’ operation? Do they have a company email address or wear the company uniform?
- Fundamental/economic reality test - for example, Is the worker paid a set wage, or do they instead invoice for their time? Is the worker independently registered as their own business? Do they have other clients?
What are some of the risks of misclassification of an employee as an independent contractor?
Incorrectly classifying employees as independent contractors can lead to serious underpayments or missing basic employment entitlements and the Business may have to pay:
- Penalties.
- Under-payment of wages.
- Leave entitlements.
- Unpaid tax and KiwiSaver.
A Worker may claim
- Employment ended incorrectly – unjustified dismissal
- Employer failed to provide minimum entitlements
Peninsula works with businesses and employers supporting them with tailored contracts, policies and documents to safeguard their staff and workplace. Call us on 0800 234 036 today to learn how we can help you.
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