Determining the type of employment of a potential employee
Determining whether the worker is an employee or contractor
Employment Relationships
Employment relationships are covered by legislation such as Employment Relations Act 2000, Holidays Act 2003, Wages Protection Act 1983, Minimum Wages Act 1983, Parental Leave and Employment Protection Act 1987, Health and Safety at Work Act 2015 just to name a few. Employment relationships can also be subject to decisions and rulings made at the Employment Relations Authority and the Employment Relations Court.
Permanent employment
This is the most common type of employment relationship, and can either be full-time or part-time, salary or waged. The employment relationship is ongoing – there is an expectation of continuous work.
Employees have to meet certain service criteria to qualify for entitlements, such as parental leave, sick leave, bereavement leave and family violence leave.
Annual leave is required to be accrued, and cannot be paid out at 8% alongside the employee’s normal pay.
Hours are required to be specified in the agreement and these are known as guaranteed hours, meaning the employee must be paid these hours at the minimum (unless in situations where the terms of a shift cancellation clause is applied to waged employees).
If the employee is between the ages of 18 and 65, and employed the employe must be automatically enrolled into KiwiSaver, unless they opt out.
Fixed term employment
A fixed term employee’s employment will have specified start and end dates (or may end when a particular event occurs) and can only be applied when there is a commercial justification for the fixed term engagement.
A commercial justification must be a genuine reason based on reasonable grounds and included in the employment agreement; for example someone who is brought in to replace another employee on parental leave, to cover a seasonal peak or to complete a particular project. Fixed term employees can be either full time or part time, salary or waged. To assess someone’s performance, or tying employment to a funding agreement are not genuine reasons.
A fixed term employee has the same employment entitlements as permanent employees. However, if employed on a period less than 6 months, will not be legally entitled to sick leave, bereavement leave or family violence leave, unless the business extends this to the employee.
For a fixed term period of 12 months or less, annual leave can either be accrued, or paid at 8% of their gross earnings alongside their regular pay. If paying 8%, this must be agreed to in the employment agreement, and be recorded separately on the pay slip.
The same hours and KiwiSaver stipulations apply as permanent employees (see above).
Casual employment
While not defined in legislation, a casual employee is understood to be engaged on an ‘as and when required’ basis. This means a casual employee is hired to provide adhoc cover for permanent employees such as unexpected absences or to provide additional adhoc support in times of peak trading. There will be a lack of regular work patterns – total hours per week, days and hours of work.
There should be no expectation of ongoing work from either the employee or the employer. Therefore, employers must be comfortable that casual employees can decline offers of work, just as an employee must be comfortable if the employer doesn’t offer work some weeks.
Casual employees do not accrue annual leave, they are instead paid an additional 8% of their gross earnings alongside their regular pay. This must be recorded separately on the payslip. However, like permanent and fixed term employees, casual employees may be entitled to sick, bereavement and family violence leave if following 6 months of employment, the employees have worked:
- An average of at least 10 hours per week; and
- At least one hour per week or 40 hours each month.
If a casual employee would have worked a day that was a public holiday, the casual employee should be paid for that day as a public holiday not worked. The same applies if the business is open and the casual employee is not offered work. This is because had it not been a public holiday, the employee would have worked it.
If the employee is between the ages of 18 and 65, and employed on a casual agreement less than 28 calendar days in length, there is no requirement to automatically enroll them into KiwiSaver.
It is important to be aware that putting an employee on a casual agreement when this is not the reality of the working relationship, can be a costly choice e.g. you would be incorrectly paying them 8% holiday pay rather than accruing leave, and if this was picked up on by a labour inspector or a personal grievance was raised, this could result in paying the employee again for this entitlement - in addition to other potential fines.
Contractor Relationships
Contractor relationships are required to abide by the Health and Safety at Work Act 2015, but are otherwise not covered by employment law (if they are truly a contractor relationship), and are governed by general civil law.
Independent Contractors
Independent contractors are engaged under a contract for service to perform services to the company.
There are currently four legal tests applied to help determine whether a relationship is truly that of a contractor. No one thing, will make the relationship a contractor, or one of employment, but it’s looking at it as a whole.
Intention
What the relationship intended to be, this is often taken from the agreement that is in place.
Control vs independence Test
The greater the control the company has over the worker they are more likely to be an employee. The opposite is true of a contractor. This takes into account, when they work, where they work, what they work on, how they work, level of supervision required.
Integration Test
Is the work required by the worker fundamental to the business, if yes, normally aligned with an employment relationship.
This looks at the type of work the employee does – is it work that is normally done by employees, is it continuous, is it of benefit to the business, how integrated the employee is in the business itself (uniform, social events, and organisation updates).
Fundamental / Economic Reality Test
What is the economic reality of the relationship – who pays the worker’s taxes, how does the worker receive payment, does the worker mainly work for one entity, advertise for work, carry financial risk etc.
More information and detail about these tests can be found from the Employment New Zealand website.
Determining the type of employment of a potential employee
When determining what the reality of the relationship for a new hire / engagement, things to consider include:
- Will employment be continuous, or will there be an end date it would conclude?
- If an end date, is there a genuine business reason for this?
- How many hours would be required to be worked each week?
- Will work be allocated in advance by a roster? Or will there be set times of work each week?
- Do you require notice if the employee is going to take leave?
If a genuine reason exists for why work is required for a finite period, then a fixed term agreement type would be best applied.
If there are consistent or predictable patterns of work, then a permanent or fixed term agreement would be best applied.
Determining whether the worker is an employee or contractor
- Will the worker have the choice of when, how and where they do the work required?
- Is the work you require to be completed, normally completed by a contractor?
- Will the worker provide their own tools and cover their own business expenses?
- The worker can wear what they want?
- The worker is not supervised or has very little supervision
- The worker does not attend social events or team / company updates
- The worker can have others do the work for them.
- The worker provides an invoice for the work they do
If the answers to the questions are mostly yes, then sounds like it’s a genuine contractor relationship.
Keep in mind, any requirements that restrict the worker greatly, then it may be best to capture the relationship under an employment agreement. To run through a more in depth checklist - check out the employment New Zealand website.
If you would like to discuss anything in this article further, please call MyHR on 0800 69 47 69 or email help@myhr.works.