“Can my boss force me to be a contractor?” – What is sham contracting?

Shine Lawyers New Zealand - Right Wrong

The employment landscape has rapidly changed in New Zealand, thanks to the rise of on-demand services, mobile apps, and the gig economy. This is even more apparent in the wake of Covid-19, which has disrupted many jobs. As a result, more New Zealanders are taking up roles as independent contractors.

Amidst this high rate of change, both employers and the legal system are grappling with issues surrounding independent contracting. In some circumstances it may be a legitimate way to engage someone – but in other cases, it’s merely a way to avoid an employer’s responsibilities towards an employee.

Every situation is different, but this blog can give a helpful starting point to the issues.

What does this mean for me?

In many cases, people are happy to work as contractors and it is appropriate for their work or role. However, if the circumstances of the role are more in line with what’s expected of an employee, but you do not have the rights of an employee, it is deemed ‘sham contracting.’

Here are some red flags to recognise it.

What is an independent contractor?

If you are an independent contractor, you are self-employed. You could be anything from an IT expert or a marketing consultant to a plumber, a house cleaner, or a gardener. As independent contractors, people make money by performing services and then billing their clients. They are responsible for paying their own tax and ACC levies – PAYE is not deducted from their fee. Some independent contractors have multiple clients, while others might primarily provide services for just one company or person.

Under New Zealand law, various tests are applied by the courts, such as the Intention Test, Control v Independence Test, Integration Test, and the Fundamental/Economic Reality Test.

The courts use these tests and weigh up many factors when determining whether someone is is legitimately an independent contractor or in fact an employee. No one thing is paramount – many variables may apply.

These factors include the following:

  • Does the person have a lot of control over their work?
    If they have more autonomy regarding their work, this may suggest an independent contracting relationship.
  • Are the hours of work set by the company or does the person decide when the work is done?
    Independent contractors usually work at their own pace (subject to deadlines) whereas an employee is usually expected to stick to a fixed timetable.
  • Insurance coverage can be a factor – courts look at who has liability for the work. An employer would have workplace insurance to cover an employee, whereas an independent contractor usually takes on responsibility for this and gets their own insurance.
  • Is the working relationship expected to continue? When someone is an independent contractor, they may not expect ongoing work. They may expect to make a pitch for the work or renegotiate in the future. An employee may expect the job to be ongoing.
  • What the person wears matters. A contractor usually decides what to wear, whereas some employees are required to wear a company uniform.
  • The tools of the trade can be an important clue. Who pays for and provides for them? An independent plumber would expect to buy their own tools and equipment, whereas a plumber who worked for a plumbing company would expect the company to pay for and provide all the equipment and tools, for example.

The existence of an employment relationship is assessed by the courts using an objective test. This means it does not matter what any party thought subjectively. The court can decide an employer/employee relationship exists even when either party did or did not have that same opinion. In addition, just because a work contract uses the specific words ‘Employment Agreement’ or ‘Contractor’s Agreement’ does not determine that is it either one.

Why do companies engage in sham contracting?

Companies bear important responsibilities towards their employees. Employees have specific entitlements under New Zealand employment law, including:

  • KiwiSaver employer subsidy
  • Leave – including annual leave and sick leave
  • Employee-related tax and ACC levy exemptions
  • Entitlements such as minimum wage or overtime
  • Access to remedies such as raising a personal grievance
  • Notice period entitlements 
  • Redundancy entitlements (if agreed)

Sometimes companies will want to avoid paying these entitlements or handling the administrative requirements of taking on an employee. They may also want to be free to get rid of a person without going through the required legal framework.

What is sham contracting?

When an employer deliberately disguises an employment relationship by engaging someone as an ‘independent contractor’ when that person should be an employee, that is sham contracting.

In New Zealand, the ERA (Employment Relations Authority) has been critical of sham contracting arrangements. They have blankly said that “simply put if employment is disguised as contracting, it’s sham contracting and the Labour Inspectorate will take enforcement action and seek penalties.”

What are my rights?

The good news is that there is legal protection if you are made to work as an independent contractor when you should be engaged as an employee. In this case, you should be entitled to all benefits that an employee would have.

In addition, your employer is not allowed to trick you into being an independent contractor.

  • Employers cannot lie to you, in order to persuade you into becoming an independent contractor.
  • Employers also cannot use threats to force you to be an independent contractor. For example, they can’t fire or threaten to fire you if you don’t agree to become an independent contractor.

How can Shine Lawyers help?

Shine lawyers have a team of employment law experts who can investigate if you have been engaged in a sham contracting arrangement and help you to recover any lost entitlements as a result of that arrangement. Get in touch today for a confidential and obligation-free discussion of your options.

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