The Cost of Getting it Wrong

The distinction between an independent contractor and an employee is not always clear, but the recent decision of the Employment Relations Authority in A Labour Inspector v Southern Taxis Ltd [2018] NZERA Christchurch 104 highlights the serious consequences for employers who get it wrong.

This case was brought to the Authority by a Labour Inspector on behalf of four of Southern Taxis Ltd's former employees. The Labour Inspector claimed that Southern had breached numerous minimum employment standards under the Minimum Wage Act, Wages Protection Act and the Holidays Act. Southern disputed the claim on the basis that the drivers were independent contractors.
In order to resolve the dispute, the Authority looked to determine the 'real nature of the relationship between the parties. In doing so, it applied the four tests set down by the Supreme Court in Bryson v Three Foot Six Ltd [2005] NZSC 34 which require the Authority to assess:

  • the intention of the parties when they entered into the agreement;
  • the level of control that was exercised over the workers;
  • the degree to which the workers were integrated into the business; and
  • whether the workers were in business on their own account.

The Authority found that the drivers intended to be employees. They had all approached Southern with a view of becoming employees and had on a number of occasions sought holiday and sick pay.

The Authority also found that Southern exercised a relatively high degree of control over the drivers. It maintained a roster which specified the drivers start and finish times and the drivers had to notify dispatch when they took a break.

The Authority agreed with the Labour Inspector that the drivers were "part and parcel" of Southern's business because they were used by Southern to meet its contractual obligations with the Southern District Health Board and Dunedin Airport to provide taxi services 24 hours a day, 7 days a week.   
Finally, the Authority considered whether the drivers were in business on their own account. Southern provided the drivers with vehicles, paid for the vehicles' upkeep, did not charge the drivers a depot fee and made PAYE deductions from the driver's wages. The Authority considered that these facts strongly contradicted Southern's claim that the drivers were operating autonomous businesses.
Having assessed the relationship between Southern and the drivers, the Authority was satisfied that the true nature of the relationship between the parties was that of employer and employee. The result of this finding was that Southern was liable to pay the drivers holiday pay calculated from the date they started working at Southern and additional wages to ensure that the driver's remuneration complied with the minimum wage. The Authority calculated the total owing to the drivers as $97,753.05.
This case should serve as a reminder for businesses that a lot hinges on whether a worker is an employee or an independent contractor. Employees are guaranteed certain rights and minimum standards which do not apply to independent contractors. These include the right to be paid a minimum wage and receive four weeks annual leave per year. Employers are also required to make contributions to employees' Kiwisaver accounts and deduct PAYE from wages. Additionally, employees cannot be dismissed without a lawful justification, while independent contractor agreements can typically be terminated in accordance with the express terms of the contract.  
As the Southern Taxis case shows, businesses need to be aware that treating workers as independent contractors when they are in fact employees can result in significant costs and penalties for the business owner.    

If you have any questions about whether your workers are independent contractors or employees, do not hesitate to get in touch with us.