NZALPA Solicitor John Hall takes a close look at a discussion paper on protecting vulnerable contractors from imbalances in contract negotiation - recently published by the Ministry of Business, Innovation and Employment (MBIE). 

The legal test for what constitutes employment and what is just a contractual relationship is one of those tough interpretation cookies of the employment law world. MBIE has come to the conclusion that the ambiguity here is having negative effects. This is something the legal fraternity has likely had concerns about for a while.

The tricky issue here is how to resolve the problem. The courts have put forward some interesting tests to determine if someone is an employee. The four main tests relate to: intention, independence, integration and economic reality. They focus on different areas, such as the intention of the parties when entering the contract, or whether the work done is a fundamental part of the employer’s business or only supplementary. But unfortunately, it has almost been a case of too many chefs in the kitchen and the confusion persists. 

There is a fundamental difference between working as an employee and working as a contractor. Employment duties arise from the ancient law regulating relations between master and servant. They are characterised by an underlying duty of good faith and a realisation that the best way to maintain an unequal relationship is to clearly define rights and obligations. Contractual duties arise from the law of contract. They are characterised by an underlying duty of skill and care in providing services to a customer and a realisation that freedom of contract favours allowing the parties to decide their own obligations. 

Minimum rights and entitlements 

As a result, MBIE’s review has some distinct objectives. One of the key outcomes MBIE identifies is ensuring employees receive their statutory minimum entitlements. This is an issue because if workers behave as employees but are treated like contractors on paper then they don’t have access to the rights that are supposed to balance out the unequal relationship of employment. For example, we were recently made aware of a situation with a general aviator who had been convinced by his firm to enter into a contracting arrangement that gave the firm the right to suspend his work without consultation. Needless to say, NZALPA finds this kind of employer behaviour completely unacceptable and welcomes any suggestion of better legal powers to combat it. 

MBIE seeks to address this by deterring the misclassification of employees as contractors. By this it means ensuring that there are legal methods to ensure that workers who are bound by contractor agreements but work like employees can be reclassified as employees and not contract workers. MBIE also seeks to address this issue by making it easier for employees to access a legally binding decision about whether they are employees or contractors. 

Imbalance of bargaining power 

The second key outcome for MBIE is to address the imbalance of bargaining power between vulnerable contractors and the firms that retain them. This objective is directed to giving greater power to workers who genuinely want to be contractors but are placed in an unequal bargaining position with the other party to their contract.

The first approach that MBIE has taken on this issue is to alter the definition of employee in New Zealand law. They foresee doing this by defining all workers within particular occupations as employees regardless of their particular contractual arrangements, and by changing the tests that the courts have been using. It is not clear how changing the definition to remove more workers from classification as employees will assist genuine contractors in a weaker bargaining position. The other approach to this issue is to enhance protections for contractors through allowing some contractors to bargain collectively and by creating an additional category of workers with some employment rights. These approaches may create unhelpful ambiguity if not handled carefully.

One area that it seems the review has not addressed is the position of employees of shell corporations that contract to parent companies for the purposes of providing labour. Such corporations may not hold any assets and might find themselves in a situation where they lose their contract to provide services to their parent company and thereby lose their income stream. This could lead to a situation where the employer doesn’t have the funds to comply with its employment obligations and provide minimum entitlements to employees because it could be declared insolvent if it does. The level of protection provided to employees in such a situation under the law currently is disappointingly low.

It is welcoming that the Government is attempting to address this difficult and harmful area of confusion in the law. However, I believe that the review needs to address the position of employees of shell corporations. Some of the approaches to addressing the imbalance of bargaining power between firms and contractors may not be as effective as they could be. Generally, the review is asking some good questions and hopefully will start a conversation that is long overdue. 

Read more about the review HERE. 

The views expressed here are reflected in NZALPA’s submission to MBIE as part of the consultation process on these changes.