Upcoming changes to employment status - An easy fix or a hot mess

Employment relationships in New Zealand are a special class of relationships. Individuals who are parties to employment relationships are afforded a number of protections, including rights to minimum entitlements, as well protections against the relationship being terminated at will. Independent contractors, on the other hand, are afforded very limited protections. When it comes to determining whether an individual is an employee or an independent contractor, courts are required to look at the true nature of the relationship which involves examining the intention of the parties, balancing factors of integration and control, and considering the fundamental or economic reality of the relationship. An employee serves the business of the hirer, where an independent contractor serves their own business.

Individuals are increasingly challenging the true nature of their "contracting" relationship and alleging that they are employees, meaning this area has seen considerable judicial attention in recent years.

This has meant that hirers have to deal with a legal grey area as to who is genuinely an independent contractor, creating uncertainty and leaving them open to significant litigation and cost risks. Getting the true nature of the relationship right from the outset is essential, but not always easy to do.

Uber is the most recent case in a slew of case law, with both the Employment Court and then the Court of Appeal determining that Uber drivers are employees. Uber has confirmed an intention to appeal this decision to the Supreme Court.

Proposed legislative reforms

Issues with uncertainty and potential unfairness in independent contracting relationships have been on the Government's radar for some time, with different parties suggesting different ways to reform this area of law. In the case of the current Government part of the coalition agreement between National and Act records an intention to "maintain the status quo that contractors who have explicitly signed up for a contracting arrangement can't challenge their employment status in the Employment Court".

There has been much discussion about what this means in practice, and we now have some degree of clarity. On 15 September 2024, Workplace Relations and Safety Minister, Brooke van Velden, announced a plan to introduce legislation that will prevent independent contracting relationships being challenged if:

1. There is a written agreement with the worker, specifying they are an independent contractor, and

2. The business does not restrict the worker from working for another business (including competitors), and

3. The business does not require the worker to be available to work on specific times of day or days, or for a minimum number of hours OR the worker can sub-contract the work, and

4. The business does not terminate the contract if the worker does not accept an additional task or engagement.

Significant questions are raised over the extent to which these four requirements are actually workable and whether they will provide real certainty.

It remains to be seen how any potential legislation will be drafted, but we can see problems arising with the proposed four gateway tests:

1. The courts frequently identify in employment status claims that hirers use contract labels to 'window dress' the real nature of relationships, holding that simply calling an individual a 'contractor' has no legal significance. While the first gateway test may introduce a different initial focus, its other elements may just shift that window dressing concern. For example, although it is simple to ensure that written documentation places no restrictions on an individual to work for a competitor, a question remains as to what will occur when, in practice, the reality of the situation is that the nature or volume of an individual's work for the hirer means that they cannot realistically offer services to others.

2. A range of issues can be identified when considering what "the worker can sub-contract the work" means in practice and how this will be interpreted. It is not at all uncommon for portrayed independent contracting relationships to document that the worker can sub-contract work, subject to the consent of the hirer. But consent is very rarely provided and, often, declined in very reasonable circumstances given the skills required from the particular contractor. It is unclear whether and how the legislation will draw the line on what is a reasonable ability to sub-contract, and consequently what level of certainty will be provided. Unarguably, control over who performs certain work is crucial to hirers, having regard to genuine issues such as compliance with health and safety legislation and work quality concerns.

3. Will the fourth test require hirers to establish why they terminated the relationship, will they be prohibited from stating that it is because the individual has not accepted an additional task or engagement, or will the enquiry simply focus on the contractual terms and whether they allow termination on the ground of refusing work? Most independent contracting relationships can be terminated on notice, without requiring any reasons to be provided. This type of test, if it is to be meaningful, could introduce a whole new level of uncertainty around the court's interest in the right to terminate an independent contracting relationship.

Other issues

In addition to potential issues with how this legislation will be drafted and applied, a number of other concerns immediately spring to mind. What will be the impact on contracting relationships which do not meet these gateway tests but have never been challenged? Both parties may be happy operating with the status quo but, as a result of this change, perceive a need to adjust the model. It is quite possible that, as hirers seek to transition to arrangements that pass through the gateway test, this alone will trigger a host of claims.

Will the new tests affect the position if a hirer and individual cannot satisfy these four tests? While the Minister says the current legal test will apply if the gateway rule does not, it is almost inevitable that the gateway tests will colour the court's approach, perhaps particularly if it is only by a fine margin that the gateway threshold is not met.

For many hirers and businesses, satisfying the gateway requirements may be unworkable given the function of work independent contractors currently undertake for the business. If status quo remains in such circumstances, hirers or businesses are likely to continue to experience uncertainty with respect to the correct legal classification of these relationships.

It is also incredibly unlikely that any legislation will be enacted retrospectively, which leaves open six years of potential claims in relation to current relationships. Parties to these relationships will need to consider how they handle the relationships going forward. Looking to change relationships may increase the practical risk of an employment status claim being brought as it will draw attention to the fact that the gateway is currently not met in the relationship.

Is there a better way forward?

It remains unknown whether Minister van Velden explored other options before settling on the 4 gateway tests. The impetus for challenging contracting relationships is concern about potential exploitation of vulnerable workers. Another and arguably more effective method to offer certainty would be to enact legislation that defines who is not vulnerable and prevent them from raising challenges. For example, those receiving anything more than a threshold level of income might be barred, but the existing legal test would remain in place for those who may genuinely need the protections of employment law.

The legal uncertainty associated with the classification of individuals as independent contractors or employees is not unique to New Zealand. Overseas, countries have considered alternative ways to address the issue. For example, the United Kingdom has a class called 'workers' who broadly sit between employees and independent contractors and who are entitled to some certain employment rights. Ontario, in Canada, has responded to the 'gig' economy by enacting the Digital Platform Workers' Rights Act 2022 (Act) which will come into force in July 2025. This Act establishes separate rights for gig workers who perform "digital platform work" (such as ride share workers or others who perform prescribed services by workers who are offered work assigned by an operator through the use of a digital platform) and sets obligations for "operators" (i.e., "a person that facilitates, through the use of a digital platform, the performance of digital platform work by workers").

Minister van Velden has stated that "I'm here to create more simplicity under the law rather than complexity". Whether this will be achieved under the proposed changes to the legislation remains to be determined - the new two-stage test has the potential to make matters even more complicated and it will be interesting to see how employers' structure their engagements with contractors to deal with the thresholds.

This article was written by Charlotte Evans, Senior Associate in the Employment team

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