When is an independent contractor really an employee?

HRD spoke to Sherridan Cook, Partner at Buddle Findlay, about the tests to determine the true nature of employment

When is an independent contractor really an employee?

The test to determine whether an independent contractor is really an employee involves examining whether the real nature of the relationship is one of employment.

And the courts routinely apply four different tests to ascertain whether that is the case, according to Sherridan Cook, Partner at Buddle Findlay.

Cook told HRD that the first of those tests is intention - what did the parties actually intend?  

“Generally, that involves looking at any written record of the relationship. For example, the contract between the parties,” said Cook.

“You can generally get a feel from that or an understanding of what the parties intended.”

It might be an independent contractor agreement that looks and feels as such. But then if that agreement incorporates things that would normally be in an employment relationship - like paid holidays and leave – “it might actually be unclear”, said Cook.

It’s also important to note that “any labels that the parties have put on the relationship are not determinative”, he said.

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The next test is the control test which involves delving into a series of questions, such as: How much control does the employer or the organisation have over the individual on a day-to-day basis (particularly over their work and working hours)? Are they supposed to wear a uniform? What work do they do? Are they able to work for other people at the same time?

Cook said the third test is integration which means looking at: How integrated is the person into the organisation? Are they there just to deliver short-term projects or are they actually holding a position that has some ongoing importance to the organisation?

For example, Cook said you wouldn’t expect people holding senior management positions to be contractors.

The final test is what’s called the fundamental or economic reality test which looks at the individual and whether they are actually in a business of their own account.

“For example, if you have someone who is only working full-time for a particular employer. While they might be submitting invoices for their time, they are not actually operating as a business at all. It points more to an employment relationship.”

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“But if, for example, they work for other organisations at the same time and they are invoicing them and running a business, have financial accounts, and paying GST, then it’s more likely they are operating as a business on their own account.

“So the court will apply those four tests, generally looking at each of them to suggest either a contractor or an employment relationship, and then they will make a determination.”

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