Contracts Of and For Service

Employee or independent contractor?

Knowing whether someone is an employee or a contractor helps an employer know what the person is entitled to when negotiating.

People work as employees under a contract of service, and people work as independent contractors under a contract for services. It is important to distinguish between the people you employ formally, and the people you contract for one-off tasks. The Employment Relations Act protects employees, not contractors.

We do not call our doctor, plumber, builder or dentist an employee, although we talk about employing a tradesperson. We contract these people for their services. Once they have provided the service and we have paid the fee, the relationship is finished.

Employees are different. When employees enter into an employment agreement, they are entering into a relationship of service. Employees are in their employer’s service for the duration of the relationship. It is not terminated by the completion of specific tasks. It continues from one task to another with the legal expectation that the relationship will last until formally terminated by one party or the other.

Judicial definition of an employee

The distinction between employee and contractor is important. Sometimes, employers have argued that their staff were independent contractors, not employees, and therefore not protected by minimum terms and conditions of employment. The Employment Relations Authority and the Employment Court govern criteria to help employers and employees decide what sort of contract they have. The courts are involved in defining whether or not a contract is of service.

Statutory definition of an employee

Section 6 of the Employment Relations Act defines an employee as:

1. …any person of any age employed by an employer to do any work for hire or reward under a contract of service; and
2. includes —

• (i) a home-worker; or
• (ii) a person intending to work; but

3. excludes a volunteer who —

• (i) does not expect to be rewarded for work performed as a volunteer; and
• (ii) receives no reward for work performed as a volunteer.

Section 5 of the Act defines an employer as ‘a person employing any employee or employees; and includes a person engaging or employing a home-worker’. A person in this context can be either an individual or an incorporated company, which the law treats as a person for certain purposes.

Section 5 of the Act defines a home-worker as:

1. …a person who is engaged, employed or contracted by any other person (in the course of that person’s trade or business) to do work for that other person in a dwellinghouse (not being work on that dwellinghouse or fixtures, fittings, or furniture in it); and
2. includes a person who is in substance so engaged, employed, or contracted even though the form of the contract between the parties is technically that of vendor and purchaser.”

Section 5 also defines a person intending to work as ‘a person who has been offered, and accepted, work as an employee’.

Simply, an employee is:

• anyone who is employed under a contract of service for money or other reward.
• anyone who works in someone else’s house but not on the house itself or any of its fixtures or fittings. This includes caregivers and cleaners whose employers send them into different homes to work. It excludes builders, plumbers, carpet layers and so on.
• anyone who has accepted a contract of service with an employer but may not yet have started work.

Employee or contractor?

In deciding whether a person is an employee or a contractor, the Employment Relations Authority and the Employment Court:

• must consider all relevant matters including the intention of the parties
• may not treat the parties’ statements describing the nature of the relationship as determinative – in other words, the parties are not necessarily contractors just because they say they are.

Types of contract of service

A contract of service can be full-time, part-time, temporary, casual, permanent, or for a fixed period. Employers and employees are free to determine which of these types of contract they will enter into, according to their needs.

Section 66 of the Act says the parties may agree to terminate the employment either:

• (a) at the end of a specified period or date, or
• (b) on the completion of a particular project.

Employers must have ‘genuine reasons based on reasonable grounds’ for fixed-term contracts. They must advise the employee of the reasons and explain when and how the employment will be terminated. This stops employers from avoiding or limiting the rights of their employees and from using fixed-term contracts to assess an employee’s suitability for permanent appointment. Section 67 provides a right to use a probationary period.