Employers be aware: Casual Employees vs Contractors
Understanding the Distinctions between and Legal Responsibilities of Employers to Casual Employees and Contractors
With clarifications in the law, it’s essential for employers to understand the differences between casual employees and independent contractors. These two types of workers offer flexibility in employment arrangements, but they come with distinct legal obligations. A recent Authority decision and proposed amendments to the Employment Relations Act have sought to clarify the rights and responsibilities of both casual employees and contractors. Employers must be aware of these distinctions to avoid potential disputes and ensure compliance with employment laws.
Contractors: Legal Tests and New Amendments
The relationship between employers and contractors can be complex. Over time, courts have developed several key tests to help clarify whether a worker is a contractor or an employee. These tests include:
Intention Test: This test examines the written agreement between the parties, which generally indicates the worker’s intended status. However, the written agreement alone does not automatically define the true nature of the relationship.
Control vs Independence Test: If an employer exercises significant control over the worker's tasks, hours, and methods, the worker is more likely to be classified as an employee. A worker who has the freedom to choose when, where, and how to work is more likely to be considered an independent contractor.
Integration Test: This test assesses whether the work is integral to the employer's business. Employees usually perform work that is essential and continuous, while contractors tend to engage in work that is more peripheral or project-based.
Economic Reality Test: This test looks at the overall situation to determine if the worker is in business for themselves, which is characteristic of a contractor. A contractor operates independently, while an employee is generally subject to the direction of the employer.
New Amendments
In September 2024, the New Zealand government introduced amendments to the Employment Relations Act designed to provide greater clarity in distinguishing between contractors and employees. These changes include a "gateway test" that applies to determine whether a worker is truly a contractor. If the following criteria are met, a worker will be classified as an independent contractor:
There is a written agreement specifying that the worker is an independent contractor.
The business does not restrict the worker from engaging with other businesses, including competitors.
The business does not require the worker to be available at specific times or for a minimum number of hours, and the worker has the option to subcontract the work.
The business does not terminate the contract if the worker declines additional tasks or engagements.
If any of these criteria are not met, the existing legal tests will apply to determine the worker’s status.
These proposed changes aim to reduce ambiguity in the classification of workers, providing businesses with a clearer framework for entering contracting arrangements. By promoting certainty, the amendments are designed to lower the risk of costly disputes and help avoid misclassification.
Casual Employees: Legal Protections and Employer Responsibilities
Hiring casual employees can offer flexibility, as in theory it allows employers to offer work on an "as needed" basis, while employees have the ability to select their shifts and manage their work schedules. However, employers must ensure casual employees are provided the same rights and protections during agreed periods of work as permanent employees.
A recent case before the Employment Relations Authority (ERA), Ford v Haven Falls Funeral Home [2024] NZERA 224, serves as a pertinent example of an employer’s legal obligations to casual employees. The facts of the case were as follows:
Facts:
Mr Ford was employed by Haven Falls Funeral Home as a casual employee.
It was agreed that Mr Ford would complete an initial eight-week training period.
Mr Ford completed about three weeks of this training in Northland before incidents occurred that led to him returning home to Whanganui.
As a result, Haven Falls decided not to offer Mr Ford any future work and notified him via a phone call and a letter soon after.
Haven Falls believed that because Mr Ford was a casual employee, he had no expectation of ongoing work, and they could inform him he was no longer required.
Mr Ford filed an application in the ERA, claiming that he was a permanent employee and had been unjustifiably dismissed.
The Authority’s decision:
The ERA upheld Mr Ford’s casual employee status and disagreed that he was a permanent employee.
Nevertheless, his dismissal was still deemed to be unjustified.
The ERA held that Mr Ford was dismissed by Haven Falls during a period of employment. This meant that despite being employed on a casual basis, while Mr Ford was engaged for his eight-week training programme, he was entitled to the same entitlements as a permanent employee – including a fair process for dismissal.
Haven Falls informed Mr Ford of his dismissal via a phone call and a follow-up letter. Haven Falls did not conduct an investigation of the incidents nor was there any consultation with Mr Ford before Haven Falls decided to dismiss him. Haven Falls also failed to give Mr Ford a reasonable opportunity to respond.
Due to Haven Falls’ failure to follow the fair process owed to an employee engaged for a period of work, it was ordered to pay Mr Ford the following amounts:
Lost wages of four weeks' pay for the remainder of the agreed training period.
Eight per cent holiday pay on top of the lost wages.
Interest on the lost wages from 11 March 2020, until payment was made.
$20,000 compensation for humiliation, loss of dignity, and injury to feelings.
This case reaffirms that employers have legal responsibilities towards casual employees during agreed periods of work. It also highlights the costs that can result from failing to meet these obligations.
Conclusion
In conclusion, understanding the key distinctions between casual employees and contractors is essential for employers to avoid breaching their legal requirements. The recent amendments to the Employment Relations Act, particularly the introduction of the "gateway test" for contractors, aim to provide clearer guidance and reduce the risk of misclassification. Meanwhile, casual employees, although engaged on a more flexible basis, still enjoy legal protections during agreed periods of work. As shown by the Ford v Haven Falls case, failing to adhere to these protections can result in costly legal and financial consequences. By ensuring compliance with the relevant legal requirements employers can protect their business from avoidable disputes and costs.