MBIE releases important discussion paper on independent contractors and employees

The difference between whether an individual is an employee or an independent contractor can be difficult to discern.  These difficulties have been highlighted with the introduction of “gig” economy workers, such as rideshare drivers, and litigation challenging the employment status of different types of workers.

A major change has been proposed by the Ministry of Business, Innovation and Employment (“MBIE”) in its Discussion Paper “Better protections for contractors”. Submissions in response to this paper close 5pm 14 February 2020.  One change proposed is to introduce a third category of worker being a hybrid between an employee and an independent contractor: a dependent contractor.

The government is concerned about the following situations:

  • Workers who are, in substance, employees, but are misclassified as ‘independent contractors’ by firms to reduce their entitlements. These workers are often subject to a high degree of control (eg perform tasks under close supervision and cannot send someone else to do the job on their behalf), but lack basic employment rights. They are often paid less than the minimum wage, have no paid holidays and can be dismissed without notice.
  • Workers who are in the ‘grey zone’ between employee and contractor status. They operate their own businesses and may use their own equipment, but depend on one firm for most of their income and have little control over their daily work. These workers do not enjoy the choice and flexibility commonly associated with self-employment and they do not have the same legal protections as employees.


Workers in these circumstances are vulnerable as they lack legislative protection and the power to negotiate better deals for themselves.

To ensure all workers have access to decent work and minimum standards and conditions the government has four key approaches:

  • Deter misclassification of employees as contractors;
  • Make it easier for workers to access a determination of their employment status;
  • Change who is an employee under New Zealand law; and
  • Enhance protections for contractors without making them employees.


Contractors versus employees

A contractor is engaged to provide services to one or a number of businesses on their own account. Contractors enjoy greater autonomy compared to employees, and may provide a specialist skill to a business. Contractors are responsible for their own tax and ACC levies, and are not protected by most employment laws (including the right to receive certain minimum entitlements, such as the minimum wage and paid leave).

An employee is employed by one employer usually and must follow all lawful and reasonable instructions given by their employer.  The employer will dictate when, where and how the employee carries out their work.  An employee is entitled to receive minimum entitlements and paid leave.

Whether or not an individual has been correctly classified as a contractor or an employee is a common question tested in the Employment Relations Authority and higher courts, and requires an intensely factual analysis of how the particular relationship operates in reality (despite what has been indicated on paper) and what was intended between the parties.


The need for change

As the report indicates, some workers fall within a 'grey area' between being a contractor and employee, and do not clearly fall into either category. A worker in this 'grey area' is not entitled to minimum employment standards (because they are not an employee), but may also not have realised the full benefits of being a contractor, such as the ability to exercise true freedom and control over their work activities.

The issues in identifying whether an individual is an independent contractor or an employee are often hidden.  However, the discussion paper notes that from March 2017 to April 2019 there were 40 determinations in the Employment Relations Authority and one Employment Court decision regarding employment status.  In 17 of these cases, workers were found to have been employees.  These cases occurred in many sectors including education, automotive, health, construction, retail, printing, transport, real estate, telemarketing and insurance. This data will capture only a small number of the matters that raised with employers as many settle on a confidential basis.



Options for Change

The government has identified 11 possible options to address issues:

  1. Increase proactive targeting by Labour Inspectors to detect noncompliance
  2. Give Labour Inspectors the ability to decide workers’ employment status
  3. Introduce penalties for misrepresenting an employment relationship as a contracting arrangement
  4. Introduce disclosure requirements for firms when hiring contractors
  5. Reduce costs for workers seeking employment status determinations
  6. Put the burden of proving a worker is a contractor on firms
  7. Extend the application of employment status determinations to workers in fundamentally similar circumstances
  8. Define some occupations of workers as employees
  9. Change the tests used by courts to determine employment status to include vulnerable contractors
  10. Extend the right to bargain collectively to some contractors
  11. Create a new category of workers with some employment rights and protections


One specific change being considered by the Government is the introduction of a new category of worker, a “dependent contractor", a hybrid between employee and contractor, who would receive some of the benefits of each category.

It is proposed that a “dependent contractor" would be entitled to minimum wage protections, paid leave, the right to collectively bargain and protection against unjustified dismissal. They would, however, remain responsible for their own taxes, and enjoy greater autonomy over their working arrangements.

Other jurisdictions, including Italy, Canada and the United Kingdom, have already adopted a hybrid category of worker. In all of these countries, the third category of worker has been entitled to some of the minimum employment standards afforded to employees, including entitlement to holiday pay, sick leave, and the minimum wage but not to “unjustified dismissal" rights.


Next steps

The Government recognises that introducing a third category worker in New Zealand could lead to further uncertainty, including more instances of misclassification between three rather than two categories.

However, much will depend on any final formulation of legislation, which has yet to be drafted and which may still be influenced by submissions to MBIE's Discussion Paper.

Submissions in response to the Discussion Paper are due by 5pm on 14 February 2020. All submissions will be reviewed by MBIE before it develops final proposals regarding the options for strengthening legal protections for “vulnerable contractors".

The link to the full Discussion Paper can be found here: https://www.mbie.govt.nz/assets/better-protections-for-contractors-discussion-document-for-public-feedback.pdf

If you would like assistance in submitting your views to MBIE, our employment team is able to help.

Article prepared by Jessica Hayes