Contractor or Employee?

The distinction between an employee and a contractor is an important one, particularly in the farming context.
Contractor or Employee?

Mark owns a dairy farm and employs a full time farm manager. Mark engages Sam to help out on the farm when it gets busy, which is most weeks. Mark shifts stock, sprays weeds, milks and assists with calving. Sam and Mark have verbally agreed to an hourly rate of pay but Sam doesn’t have an employment agreement or a written contract. Mark decides what time Sam will start and finish work and what work he will do on the farm. Sam issues Mark an invoice for his work every month or so and Mark pays him at the same time he pays his farm manager. Sam isn’t good with numbers so Mark’s wife pays his tax for him. Mark’s children are returning from university for their summer holidays to work on the farm. This means that Mark won’t need Sam so he tells him that he won’t be calling him up for a work for a few months. Mark has now received a letter from Sam’s lawyer. Sam has raised a personal grievance for unjustified dismissal. Will Sam’s claim be successful?

In order to be able to bring such a claim in the first place, Sam has to prove is that he was an employee not a contractor.

The distinction between an employee and a contractor is an important one, particularly in the farming context. Farms often have a number of people involved with day to day operations. Being clear on who is an employee and who is a contractor is vital.  Simply calling someone a contractor or an employee is not enough. If challenged, the Courts will look closely at the details of the relationship.

The types of questions asked by the Courts include:

  • What does the written agreement between the parties say? The starting point is always what is written down, but an agreement saying someone is a contractor can and will be overturned by the Courts if the reality of the daily work suggests the person was actually an employee;
  • Who pays the tax and ACC levies? A contractor pays their own, while an employee has these paid by their boss;
  • Who decides what jobs are done and when? A contractor sets their own hours and is free to decide what work is done and when. An employee is usually directed to do certain tasks at certain times. Similarly, a contractor decides when they take holidays or leave early, whereas an employee often has little control over these decisions, or requires someone else’s approval first;
  • Is the job being done one that is usually done by a contractor or an employee? For some tasks this will be easily answered, such as fixing the milking plant which would usually be done by a contractor, not an employee. For others, such as relief milking or spraying weeds, this question is not so easy to answer;
  • Is the person’s work integral to the farm? A person who is performing key tasks on farm is more likely to be considered an employee than someone who is doing things that are incidental to the farm operation. For example, someone who is shifting stock and fences on a daily basis is more likely to be an employee than someone who comes in to repair the fences when asked to do so by the owner or manager.

In summary, if you have contracted with an individual to work hours that you prescribe, in your workplace, carrying out core functions of your business, it is highly unlikely that person could be a contractor. On the other hand if you contracted to get a task done, and that person can choose (within reason) when it is done and who can do it, and particularly if it is not core to your business, then it is unlikely to be employment.

Why is the distinction so important?

Employees are protected by the Employment Relations Act 2000 and have clear options open to them if a grievance arises. They have rights under the Act, but from their perspective have limited control over the type of work that is done and when. In contrast, contractors have much more freedom over the work done and the days worked, but are responsible for paying their own tax and ACC levies. 

Having a clear understanding at the outset is vital for both parties. What matters is not just what is written down but what actually happens day to day. The consequences for getting it wrong can be stressful and expensive, regardless of whether you are an employer, employee or contractor. If you are confused or worried by the employee/contractor distinction, contact georgia@gallie.co.nz to talk it through in more detail.

In my experience it certainly pays to get it right from the beginning! 

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