By Vaughan Granier
Since COVID-19, New Zealand’s economy has been impacted significantly – you only need to see the latest unemployment figures to understand how this pandemic has created huge financial stress for our people and businesses. In many cases, businesses have or will be restructuring to survive in a new and far more challenging environment. So how do we restart our economy in such a volatile climate? The best way is to get people back into employment and as quickly as possible.
Through our Telephone Advisory Service (TAS), some of our clients have expressed caution about committing to the risk of long-term costs such as increasing their workforce right now. While many people are seeking stability in jobs, and employers are looking for opportunity and returning to normal business dynamics, we don’t believe there needs to be a clash between the two. In this article, we explain why engaging with independent contractors may be a good option for some businesses right now and possibly the way of the future!
What’s the alternative?
As we’ve already alluded to, getting people to work for a company does not always mean having to hire employees. There are many reasons why a business would want to hire employees and many reasons why a business would NOT. But there is always work to be done and, mostly, it is people who need to do it.
So, what options do businesses have when it comes to workforce structuring? There are four ways a business can build its capacity to deliver results:
- Hire employees.
- Hire contractors.
- Outsource completely.
Outsourcing, and to some extent automation, are two options – but they’re not the purview of this article. These options take the business dynamics completely out of the employment law space and into commercial relationships and strategic decisions. Terms are agreed on through a business contract, or an investment is made, and that is that. However, most things a business is required to do, need people to do them on a daily basis. Therefore, outsourcing and/or automation are not always possible. Creativity, insight, coordination, adaptability and flexibility are fundamental to the success of most businesses, and those qualities are found in people.
Hiring employees is the primary and most obvious way of achieving business outcomes. Employees are something of a ‘captive resource’ – the business ‘owns’ their time, skills and experience for its own benefit, and this can be a huge competitive advantage (if you hire them well, and if you manage them well). In the limited pool of available talent, the talent you have hired, obviously, is talent your competitors cannot hire! This competitive advantage comes, though, with ongoing obligations in both directions. From the employee to the employer, this is obviously dedicating the employee’s time and ability to the employer all day, every day. From the employer to the employee, it is salaries/wages, fair and good faith management processes, and development.
In a highly volatile time for companies, such as an economic depression, a long-term commitment to employment relationships, with fixed costs etc., can be a very terrifying thing. In addition, when an entire economic model is tested and found to be stiff and unyielding when flexibility is required the ‘old ways’ of doing things can be re-evaluated in favour of a ‘new way’ of achieving the same results. We believe there may come a shift away from the default of recruiting employees, to engaging independent contractors, which is the attractive middle ground between hiring employees (and incurring a long-term fixed cost), and completely outsourcing (and losing control of process and creativity). We believe this might become a growing trend in the future.
What defines an independent contractor?
In everyday language, a contractor is a person hiring out their expertise (as an individual or as a business) to another individual or business, but not as an employee. There is no exclusivity of the relationship and no expectation of permanent commitment. They are usually also generally free to deliver the results how they want, using the tools they want and even using the people they want, as long as the result meets the expectations and deadlines of the agreement. For many contractors, there is generally a time-based component (either in how they’re paid or in how they’re managed), which is where things become confusing.
The benefits of this model are that the open-ended fixed expense of a long-term employment relationship is done away with. Contractors are generally hired for expertise over a short period of time, for a known cost, and they lie outside employment laws surrounding the provision of workplace benefits and the termination of contracts. Because contractors lose the very strong protection of the employment laws, the government is very focussed on ensuring that businesses do not classify employees as contractors, to get around the protections and the ongoing costs.
It does not only happen deliberately, which is unfortunate for some unsuspecting employers; they can sometimes appoint a contractor in good faith but without clearly defined relationship boundaries. Then a business’s treatment of their contractors can result in them later on being regarded as employees. This usually only becomes apparent when the business terminates the contractor, who believes they should have been an employee all along and challenges the termination. It can also happen if a contractor discovers and feels aggrieved at not receiving some benefits that others might be receiving.
What benefits and protections do employees have that contactors do not have?
- Protection against dismissal/loss of work except for certain well-defined reasons.
- Entitled to be managed in accordance with very well-defined good faith processes and principles and with rights that afford some protection.
- Entitlement to communications and information that help you participate in employee life.
- Access to certain paid benefits, like annual leave, sick leave, and bereavement leave.
How does terminating a contractor incorrectly cost a business?
An independent contractor’s contract has a termination clause, and a business can use it in good faith. But then if this is challenged, the law might say you should have terminated them as if they were an employee because, in hindsight, they WERE an employee. But because you didn’t do that (and you didn’t know you had to, but you are stuck with this now!):
- You will pay an amount of damages for breaching the law.
- You will perhaps compensate an amount for humiliation and embarrassment.
- Perhaps you might even have to reinstate that person to employee status!
- You will likely also have to backpay all the benefits an employee should have received that the contractor did not receive, such as annual leave, sick leave etc. That can be a very unexpected cost.
So how should an employer behave with a contractor to keep the relationship clear and categorically an independent contractor relationship?
There are four (simultaneously applied) tests that have become standard in determining whether a person is an employee or an independent contractor. In a summarised form they are:
- Intention test
- What does the contractual document intend through its words?
- What benefits does the contractor receive, or not receive?
- Control test
- Can the contractor work whenever they want, wherever they want to achieve the outcome?
- Can the contractor organise their own delivery using whatever tools they want, and whoever they want to achieve the outcome?
- Integration test
- Is what the contractor is doing, integral to the business and are they integrated into the team of the business through meetings, events, communications, uniform, equipment/PPE issue etc?
- Is the contractor paid by the hour as if on payroll, or for results (services rendered) and reimbursed for expenses?
- Economic reality test
- Is the contractor paid a wage or a fee?
- Does the contractor pay their own tax, GST, ACC; and issue invoices for their work?
- Can the contractor work for multiple businesses and can they make a profit or suffer loss?
Answering these basic questions and a few deeper nuances can give an employer confidence that they are contracting with a person in the correct way. Specifically, if the relationship is tested, then the relationship will be exactly what they expected or intended it to be, and they will avoid the financial consequences of an error.
While employing an independent contractor instead of an employee may not always be possible, and in many cases should not be done (for example, where the work is integral to the business and having an employee integrated into the organisation is fundamental to the business method), we understand that some businesses will be interested in a new approach to managing the high costs of employing people. In those cases, this short guide may provide some guidance around why, how, where and most crucially IF this may be possible. Given the potential pitfalls, we encourage caution in this regard.
If you have any questions about engaging with an independent contractor, please contact HR Assured.
Vaughan Granier is the National Workplace Relations Manager for HR Assured NZ. He has over 24 years’ experience in international human resources, health and safety, and workplace relations management. With over 10 years working in New Zealand and Australian companies, he provides in-depth support to leadership teams across all areas of HR, Health and Safety, and employee management.