Employees vs contractors – What do employers need to know about how the Uber decision affects us now?
On the 25th of October, in Arachchige v Rasier New Zealand Ltd, New Zealand’s Employment Court headlined both domestic and international media outlets when it declared that four Uber drivers were employees. Adjectives like “landmark”, “historic” and “ground-breaking” were used liberally, albeit a tad prematurely, as Uber has already signalled its intention to appeal. Considering the fine margins this case was judged on, it may take a Supreme Court ruling for the dust to settle on this issue. Appeals like this can take months (if not years) to conclude, and there’s every chance that Uber could lose interest in funding a protracted litigation. They are likely to be weighing this up with the potential cost if more Uber drivers were successful in similar cases, and the financial liability associated with other Uber drivers being successful in similar cases and decisions. Until then, it would be prudent for any business owner who utilises contractors as part of their operations to get their head around the Uber decision and its potential implications.
Why is this decision important?
Although Judge Inglis was careful to limit the decision to the four drivers involved in the case, it follows the recent judgments (such as in the cases of Leota v Parcel Express Ltd and A Labour Inspector v Southern Taxis Limited), in which long-held practices in those particular industries, of populating their labour force with workers on independent contractor agreements, have been challenged. While Leota and Southern Taxis took aim at New Zealand’s courier and taxi industries, the Uber decision has repercussions on the wider gig economy, with homecare workers, construction sub-contractors and truck drivers likely to also take a keen interest.
The significance of obtaining a declaration of employment status is that, as Judge Inglis aptly put, those employees can then “access a suite of legislative minimum employment entitlements” including the minimum wage, rest and meal breaks, a range of leave entitlements, the option to bring a personal grievance, and to access union membership and/or partake in collective bargaining.
This declaration may not, in itself, be an issue, but the liability involved in backpaying entitlements could add up to a significant amount of money depending on the length of the working relationship.
K3 Consulting’s, Karyn Gould, also warns of additional costs, such ai.e. business owners may be at risk of receiving penalties from entitiles such as the Inland Revenue and/or the Employment Relations Authority which could involve fines, interest or damage to reputation; or impact declarations that need to be made to Immigration New Zealand that risk an employers’ to the ability to recruit employees on visas.
How has “what makes someone an employee” changed over time?
The entire employee v contractor question rests on section 6 of the Employment Relations Act 2000, which defines what an “employee” is. That section requires the court, when contemplating whether to declare someone as an employee, to consider the “real nature” of the contract of service and to consider all “relevant factors” that might indicate the intention of the parties.
Over time, these relevant factors have narrowed to a set of principles, clarified in the Supreme Court case Bryson v Three Foot Six Limited, as follows:
(a) the written and oral terms of the contract;
(b) the way the relationship operates in practice;
(c) the level of control and integration, and whether the person has been effectively working on their own account; and
(d) industry practice.
These were the same factors applied by the Employment Court two years ago, when an Uber driver first sought to challenge their status as a contractor in Arachchige v Rasier New Zealand Ltd. In this case, in applying the Bryson principles, Judge Holden refused to declare Mr Arachchige as an employee, as he found that Uber had very little control over the way Mr Arachchige carried out his business, as he could work in the manner and at the times he wished.
At a fundamental level, the law hasn’t really changed. Judge Inglis again focused on the definition of an employee in the Employment Relations Act 2000 and the factors set out in Bryson; however, despite the working relationship in the new uber case being identical to that of Arachchige, Judge Inglis declared that the four drivers were in fact employees. How? Well, Judge Inglis acknowledged early in her decision that the drivers did not work in a traditional employment model, but she found that there was, nevertheless, a high level of control and subordination that Uber held over the drivers. She recognised that rapidly advancing technology – citing Uber’s rating system, incentive scheme, warning system and deactivation for inactivity – are new methods by which Uber holds control over its drivers.
She also stepped back and looked at the fundamental question of who is actually running a business? True independent contractors are self-employed business owners – able to dictate the terms of their trade and choose how to operate their service. However, Judge Inglis stated that Uber dictated and managed the circumstances under which its business is carried out, and the drivers were deployed to grow and benefit that business – factors indicative of an employment relationship.
What defines what truly makes someone a contractor?
A business may assume that just because they are being paid by invoice, and the person is taking responsibility for their taxes, ACC or GST payments that they are a contractor.
In brief, there are 4 tests that determine if someone should be treated as a contractor:
(a) Intention test – this is usually determined from the wording in the parties’ written agreement, but can also include verbal agreements
(b) Control vs independence Test - the greater the control exercised over the person’s work content, hours and methods, the more likely it is that a person is an employee. A worker with greater freedom to choose who to work for, where to work, when to work, the tools used and so on, is more likely to be a contractor.
(c) Integration Test - this looks at whether the work performed by the person is fundamental to the employer’s business (and whether they are ‘part and parcel’ of the organisation). Usually work performed by a contractor is only a supplementary part of the business.
(d) Fundamental/economic reality test – this looks at the total situation of the work relationship to determine its economic reality, and whether a person is in business on their own account. This may include elements such as being able to advertise their services, set their own fees, whether they accept work, or whether they can accept work from multiple sources.
Due to the fluidity of the factors, the relationship is not static. It might start out as a contractor relationship, and then morph into an employment relationship if, for example, if the business starts exercising a great deal more control over the person’s activities.
My business currently utilises independent contractors – what should I do?
As outlined above, the consequences of a declaration of employment status can be considerable, particularly if several contractors obtain declarations at the same time.
As a business owner, this is a perfect opportunity to take a stock-take of your contractors. Karyn Gould suggests, you may also want to use this opportunity to stock-take other aspects of the relations, such as, whether you have a current signed copy of your Health and Safety Agreement with your Contractor. These types of documents also need to be reviewed and updated on a regular basis to ensure that you meet your legal obligations.
Make a list of your contractors, their purpose and their terms of engagement with you. Evaluate any gaps, and engage in conversations to minimise or fill these gaps.
Where you could be in a situation, where you are unsure of whether the person could be considered a contractor or an employee, seek advice before speaking with them on the topic.
Where you do believe, the relationship is in fact an employment relationship, then you will need to engage in a process to either transition them from contractor to employment terms, or renegotiate the ways of working so that it truly forms a contractor relationship. This can be a complex process, as rates of pay can be disparate between employees and contractors, due to factors like paid leave entitlements; and/or a contractor may also gain benefits from certain tax deductions, which they may not want to lose. Be sure to be open, transparent, and work constructively to negotiate a way forward.
Another option could be to consult with an HR consultant or employment lawyer and obtain an independent opinion or how your contractors may be viewed under the law, and the approach you could take to make any corrections.
(Note: The Tripartite Working Group on Better Protections for Contractors has presented its recommendations for the Government to consider. Expect further changes in the near future).