Understanding Sham Contracting
Sham contracting refers to the misrepresentation of an employment relationship as an independent contractor relationship. This typically occurs when an entity attempts to classify a worker as an independent contractor to avoid the legal obligations associated with being an employer.
In New Zealand, an employee is defined as a person employed by an employer to do work for hire or reward [Source: Employment Relations Act 2000, s 6(1)]. An independent contractor, by contrast, is a self-employed individual who provides services to another entity under a contract for services, without being an employee.
The determination of whether a person is an employee or an independent contractor depends on the "real nature of the relationship between them" [Source: Employment Relations Act 2000, s 6(2)]. This means that the label or description given to the relationship by the parties is not the sole determinant. The Employment Relations Authority (Authority) and the Employment Court (Court) consider various factors to ascertain the true nature of the relationship, which may include:
- Control: The degree of control the principal (the entity receiving the services) has over the worker's duties, hours, and work methods.
- Integration: How integrated the worker is into the principal's business operations.
- Tools and Equipment: Who provides the tools and equipment necessary for the work.
- Risk: Who bears the financial risk of the work (e.g., potential for profit or loss).
- Right to Delegate: Whether the worker can delegate their duties to another person.
- Exclusivity: Whether the worker is free to work for other clients or businesses.
Obligations of Employers to Employees
If a worker is deemed an employee, even if initially labelled a contractor, the entity engaging them has specific legal obligations as an employer. These obligations include:
- Individual Employment Agreement: Providing a written individual employment agreement [Source: Employment Relations Act 2000, s 59].
- Minimum Wage: Paying at least the minimum wage [Source: Minimum Wage Act 1983, s 6].
- Leave Entitlements: Providing entitlements such as annual leave [Source: Holidays Act 2003, s 16], public holidays [Source: Holidays Act 2003, s 44], sick leave [Source: Holidays Act 2003, s 65], and bereavement leave [Source: Holidays Act 2003, s 69].
- Good Faith: Operating in good faith with the employee, which involves being active and constructive in the employment relationship, acting honestly, openly, and without misleading each other [Source: Employment Relations Act 2000, s 4].
- Health and Safety: Ensuring a safe working environment [Source: Health and Safety at Work Act 2015, s 36].
- PAYE and KiwiSaver: Deducting Pay As You Earn (PAYE) tax and making employer contributions to KiwiSaver, where applicable.
Penalties and Consequences for Employers
Employers found to be engaging in sham contracting face significant penalties and consequences:
- Pecuniary Penalties: The Employment Court can impose pecuniary penalties (financial penalties) on employers for serious breaches of employment law, especially those designed to circumvent minimum entitlements or other employment standards [Source: Employment Relations Act 2000, s 142A]. These penalties can be up to $50,000 for individuals and $100,000 for companies for each breach.
- Breach of Minimum Entitlements: The Employment Relations Authority or Employment Court can order an employer to pay any outstanding wages, holiday pay, or other entitlements that were unlawfully withheld from the worker [Source: Employment Relations Act 2000, s 135]. This includes arrears for annual leave, public holidays, sick leave, and minimum wage.
- Personal Grievances: If the worker was treated as an independent contractor but is found to be an employee, they may be able to raise a personal grievance (a complaint an employee can raise against their employer for an alleged wrong) for unjustified disadvantage or unjustified dismissal, among other matters [Source: Employment Relations Act 2000, s 103]. This can result in orders for lost wages, compensation for humiliation, loss of dignity, and injury to feelings.
- Tax Obligations: Employers may face penalties from the Inland Revenue Department (IRD) for failing to deduct and pay PAYE, make KiwiSaver contributions, and meet other tax obligations associated with being an employer.
Rights of Misclassified Individuals
Individuals who believe they have been misclassified as an independent contractor when they are in fact an employee have the right to:
- Seek a declaration from the Employment Relations Authority or Employment Court that they are an employee.
- Claim any unpaid wages, holiday pay, or other entitlements they would have received as an employee.
- Raise a personal grievance for any unjustified actions taken against them by the employer, such as unjustified dismissal or disadvantage.
When to Seek Independent Legal Advice
Individuals or entities with concerns about worker classification, employment status, or potential sham contracting issues should seek independent legal advice. Information and assistance can be obtained from official government bodies such as Employment New Zealand, or from a lawyer specialising in employment law. Community Law Centres throughout New Zealand also provide free legal advice on employment matters.