May Tax Alert


Employee or independent contractor?

Tax Alert - May 2020

By Andrea Scatchard

This is a question that we are often asked, and it is an area where there are no clear tax legislative guidelines. Rather the answer to the question needs to be found by examining the particular circumstances and considering the principles drawn from what are usually non-tax related rulings and decisions.

Organisations seek to engage with individuals as independent contractors, as opposed to as employees, for a number of reasons which are usually unrelated to tax. If an individual is ultimately found to be an employee though, the employer is not only subject to the various obligations imposed by employment law but is also required to account for PAYE, KiwiSaver and other associated taxes to Inland Revenue. This can increase the overall cost of engaging with the individual, especially if Inland Revenue seeks to upset the tax treatment of past payments to the individual.

The status of the individual will also impact which party is eligible to apply for the COVID-19 Wage Subsidy.

Approach taken by the Courts

Over the years the Courts have evolved a series of tests which are used to assess whether an individual is an employee or an independent contractor. In our experience there will usually be factors pointing to each side of the argument, and the end result will be a balancing of the competing factors.

The tests can be summarised as follows: 

  • Intention test – looks at the intentions of each party towards the agreement as to the nature of the relationship. 
  • Control test – examines the degree of control the employer or principal exerts over the manner in which the work is done. 
  • Independence test – examines the level of independence the person engaged to perform the services exerts over their work. 
  • Fundamental test – considers whether the person engaged to perform the services is doing so as a person in business on their own account.
  • Integration test – looks at whether the person engaged to perform the services is integrated into the business or is an accessory to it.

Parcel Express decision

An employment court ruling was made on the 7th of May, determining a courier driver (Mr Leota) was an employee despite signing a contract that referred to the driver as an ‘independent contractor’.

Mr Leota was employed by Parcel Express as an independent contractor. Many of the terms of the arrangement appear to be ones which we would typically consider indicate that the arrangement is one of an independent contractor. Mr Leota was required to purchase his own van and pay for the signwriting of it. He was unable to take more than 20 days’ holiday a year without approval from Parcel Express. Any time he did wish to take off required him to give notice in advance. He was also required to make approved arrangements for a replacement driver during any time he took off. He was expected to be GST registered, although he was not.

Despite these factors, the Chief Judge, Christina Inglis, considered that the relevant aspects of control and integration included in the contract undermined and overrode the assertion that Mr Leota was an independent contractor. Some of these factors included:

  • Mr Leota’s delivery run was predetermined by Parcel Express - the company could change the run at any time and did not need Mr Leota’s approval;
  • He was responsible for completing the run full-time, Monday to Friday;
  • He could only pick up from, and deliver to, the customers identified by Parcel Express;
  • Parcel Express did not allow Mr Leota to change his days of work and he was required to be back at the depot at three specified times during the day.

While accepting the some degree of control may be inevitable to ensure the efficient operation of both parties’ businesses, the Chief Judge felt in this case that Mr Leota did not exercise any real degree of autonomy over his work and had no real opportunity to grow his own business. Mr Leota did not have spare time to engage in client-building exercises, the customers were Parcel Express customers and he was effectively building ‘their’ business. It was clearly stated in his agreement that in the event of him leaving the company, Mr Leota was unable to take the business with him.

As a result of these facts, the Chief Judge ruled that Mr Leota was an employee of Parcel Express due to the level of control and inability for Leota to grow his own business. The Chief Judge stated that, “I do not have any difficulty concluding that Mr Leota was not in business on his own account”. She also makes the point that, “Whether a particular worker is an employee is an intensely fact-specific inquiry. There is no presumption that whole categories of workers are independent contractors”.

The key point to take from this is that while common industry practice may be relevant in assessing a person’s status, this case reinforces that the specific facts of each individual must be considered as they could diverge from the usual practice.

What next?

This decision, which may yet be appealed, is obviously highly significant to the courier industry in particular. But it has relevance to all situations where independent contractors are engaged in circumstances where that line between employee and contractor may be blurred.

We know that this is an area where Inland Revenue has been fairly active in recent times, and regardless of the outcome of any appeal we think it is likely that Inland Revenue will renew its focus here when its investigative staff are directed.

If you engage with independent contractors, or maybe you are one yourself, now is a good time to consider the correctness of this treatment. Please contact your usual Deloitte adviser you would like to discuss the implications of this case.

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