The importance of classifying contractors correctly

The COVID-19 pandemic has no doubt caused significant disruption and organisational change for many employers. However, it cannot be used as a reason for circumventing normal employment law obligations that continue to apply, regardless of the circumstances we find ourselves in.

A recent decision by the Employment Court of New Zealand in Leota v Parcel Express Limited [2020] NZEmp 61 brings home the importance of reviewing the employment status and the written contracts of independent contractors.

Currently, there are only two categories of workers in New Zealand: employees and independentcontractors. Employees are afforded special employment statutory rights and protections such as minimum wage, leave entitlements and the right to raise a personal grievance under the Employment Relations Act 2000 (ERA). In contrast, independent contractors are deemed to be in business on their own account – ‘an entrepreneur’ – and don’t enjoy the statutory rights and protections afforded to employees.

The Leota v Parcel Express Limited [2020] case concerned a courier driver (Mr Leota) who signed an independent contractor agreement with the company, Parcel Express Limited. Following a series of payment issues, Mr Leota sought a declaration from the Court that he was an employee of Parcel Express Limited. If successful, Mr Leota would be able to retrospectively apply for the statutory benefits that go with being an employee.

Section 6 of the ERA requires a Court to determine the “real nature of the relationship” between the parties, not just the label the parties are calling it.

The Court applied well-established legal tests to assist in its assessment of Mr Leota’s status. It also helpfully provided a summary of the key indicators that might signal an employment or independent contractor status:

Reference: Employment Court of New Zealand

The high level of control that was exerted by Parcel Express Limited over Mr. Leota’s work was noteworthy. Some of the factors that supported the decision that Mr. Leota was indeed an employee included:

• Mr. Leota was assigned a ‘run’ or delivery area, with boundaries set by the company, without Mr. Leota’s input
• Mr. Leota was required to purchase his own van that met the specifications outlined by the company and had to display company signwriting on it (he was prohibited from displaying any other signage including his own name)
• Mr. Leota was required to work where and when directed by the company, and to work in the company’s best interests at all times
• Mr. Leota was obliged to wear a company uniform
• Mr. Leota was obliged to comply with any directions of the CEO or senior managers
• Mr. Leota was required to participate in in-house briefings and instructions
• Mr. Leota was required to pay a NZ$2,000 bond and lease a scanner for NZ$120 a month
• Mr. Leota was required to hold insurance with a company-approved insurer
• Mr. Leota was restricted from taking more than 20 days’ holiday per year and had to organise a relief driver approved by the company during any period of leave
• Mr. Leota was subjected to a restraint of trade for a period of six months after termination within a 100km radius of Auckland CBD (central business district).

Ultimately, the Court held that despite Mr. Leota’s agreement stating that his relationship with the Parcel Express Limited was that of an independent contracting party, the “real nature of the relationship” was one of employment.

Although the Court stressed that its decision was limited to the particular facts of the case, there are potentially wider implications for owner/driver operators in the courier industry.

The decision provides a timely reminder for businesses that involve owner/operator drivers to review their practices and ensure the day-to-day working relationship is genuinely one of principal/contractor. Be aware of the risk that the real nature of the relationship can evolve over time into what is in effect an employment relationship.

If a business was to get this wrong, the legal and financial consequences can be significant. Miscategorised employees like Mr. Leota will become entitled to payment for holiday pay and lost wages (e.g. if their remuneration falls below the requirements of the Minimum Wage Act 1983), while also having access to the personal grievance regime provided under the ERA. These are consequences that most businesses, particularly in the current climate, will find difficult to bear.

Disclaimer: The content of this article is general in nature. It is not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

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