Independent Contractor or Employee? It's critical to know the difference

A recent Employment Court case Leota v Parcel Express Limited is a reminder of the importance of correctly classifying workers.

Work arrangements

Mr Leota worked as a courier driver for Parcel Express Limited (PEL) under an agreement that referred to him as an independent contractor. There was a high level of control by PEL. Mr Leota had to comply with directions of managers. They directed his service routes and his day to day work – what, when, where, how and by whom. They specified his type of vehicle – colour, signage - audited his mileage, restricted his leave. Under the contract Mr Leota was subject to a restraint of trade.

Mr Leota was terminated by PEL. He sought a declaration that he was in fact an employee which in turn would allow him to bring a personal grievance for unjustified dismissal.

Employment Court ruling

The Employment Court held that Mr Leota was an employee and the “real nature of the relationship” between PEL and Mr Leota was one of employment.

It didn’t matter what the contract said. Stripped back to basics, the essential issue is - does the worker service their own business or someone else’s?

Termination issues

If a business terminates someone they think is a contractor and just gives them notice and the person is actually an employee, then the business pretty much has an indefensible personal grievance claim for unjustified dismissal. Added to this is that employees have to be given paid annual leave and sick leave. Contractors don’t. So if the worker hasn’t been correctly classified as an employee they can claim for unpaid annual leave, sick leave and the like.

Tax implications

Incorrect classification of workers can also have serious tax ramifications.

The employment law tests are relied upon when determining a worker’s status for tax purposes. If an individual is found to be an employee, the business is not only subject to the various obligations imposed by employment law, but is also required to account for PAYE, KiwiSaver and other associated taxes. This can increase the overall cost of engaging the individual, particularly if Inland Revenue seeks to upset the tax treatment of past payments to the individual. An individual found to be an employee would lose the ability to deduct certain costs, lose the right claim and charge GST and may need to reverse previous tax returns.

If you engage with independent contractors or may be one yourself, now is a good time to review your arrangements. Call our Employment Team on 03 211 0080.