Jim Roberts, Partner and Victoria Bortsova, Solicitor at Hesketh Henry, discuss the legal distinction between contractors and employees by taking an in-depth look at the recent decision handed down by the Employment Court in Leota v Parcel Express Limited [2020] NZEmp 61.
The legal distinction between contractors and employees can sometimes be a fine one. Being an employee, rather than a contractor, is generally (and in most cases) advantageous to the worker as it provides access to a range of entitlements, including minimum wage, personal grievances, leave entitlements and the right to bargain collectively. True independent contractors are not afforded the same minimum rights enjoyed by employees. In New Zealand, all workers have a statutory right to seek a declaration as to whether they are an employee or an independent contractor.
The decision of the Employment Court in Leota v Parcel Express Limited [2020] NZEmp 61 provides important guidance in determining employment status, and represents a reset of the ‘owner–driver’ courier model. The decision is not under appeal. The decision succeeds and displaces the previous leading owner-driver courier judgment of TNT Worldwide Express (New Zealand) Ltd v Cunningham [1993] 3 NZLR 681, which was decided in the context of the Employment Contracts Act 1991.
While the enquiry was only about Mr Leota’s status, which the Court was quick to note, it is a significant decision. The ramifications for the courier industry are immediately apparent; however the judgment is likely to also have an impact on other industries which rely heavily on workers who have been labelled contractors, but may not be contractors as a matter of law.
Background
A full copy of the judgment can be accessed here.
Mr Leota worked as a driver for a courier company, Parcel Express Limited (Parcel Express), for approximately one year. Following a dispute about an allegedly outstanding payment, Mr Leota left his role with Parcel Express. Mr Leota made an application seeking directions from the Court that he was an employee of Parcel Express. In response, Parcel Express argued that Mr Leota was an independent contractor. The dispute centred on the definition of an “employee” under s 6 of the Employment Relations Act 2000 (the Act).
The agreement between the parties identified Mr Leota as an Independent Contractor, however it also contained a host of restrictions and obligations, including: the type of van that Mr Leota could drive, the requirement for the van to display the Parcel Express logo at Mr Leota’s expense, the requirement for Mr Leota to obtain insurance cover with an insurance company approved by Parcel Express, and for Mr Leota to work at the locations and times specified by Parcel Express. In addition, the agreement contained a restraint of trade clause for a period of 6 months and within a 100 kilometre radius of the Auckland central business district.
The Decision
In a judgment delivered by Chief Judge Inglis, the Employment Court held that while the agreement identified Mr Leota as an independent contractor, the “real nature of the relationship” between Mr Leota and Parcel Express was one of employment.
The Court has made it clear in Leota that the worker’s status must be assessed by applying the test set out in s 6 of the Employment Relations Act 2000, and the principles explained by the Supreme Court in Bryson v Three Foot Six Ltd. This requires a consideration of all relevant matters under section 6(3) of the Act. The Court considered that these include, along with any written agreement:
- How the relationship truly operated in practice;
- The degree of control exercised by the company or the business;
- Whether the person worked on their own account; and
- Whether the business or company could effectively operate without the person’s role
Importantly, the Court emphasised that while the working relationship could be described in a particular way in Mr Leota’s agreement (as, for example, where Mr Leota was described as a contractor) this will not be determinative of the Court’s overall assessment.
In addition, the Court considered the level of control exercised over the worker, and approved the view the Employment Court has previously taken in Bryson: that features of control could be strongly indicative of an employment relationship.
In this case, the high degree of control exercised over Mr Leota included Parcel Express requiring Mr Leota to comply with the directions of its managers; directing the service routes; directing and controlling the “day-to –day work, what, when, where, how and by whom”; controlling the type of vehicle, its colour scheme, and that it must be sign written with Parcel Express’s logo; auditing Mr Leota’s mileage (without his knowledge or consent); restricting the amount of leave that he could have; together tied the courier driver exclusively to the company. In addition, the restraint of trade clause suggested that Mr Leota relied on the company for income and could not work elsewhere, which further pointed in favour of an employment relationship.
Parcel Express attempted to run an industry practice argument, also known as the ‘everybody in the industry does it’ argument. The Court noted that while it may be relevant, “it is a factor best approached with caution.… The mere fact that an industry considers that its workers are engaged as independent contractors cannot, of itself, be enough. It may simply reflect a mistaken understanding as to the actual legal status of some or all of its workers”. That is a stark warning to other industries that also engage a large number of workers using the label ‘independent contractors’.
Parcel Express asserted that Mr Leota could build his own business. The Court found, however, that Mr Leota was required to refer potential clients to Parcel Express’s employed sales manager; that the customers were Parcel Express’s customers, not Mr Leota’s; and he was subject to a restraint of trade when he left. The Court found that “[t]he totality of the evidence strongly suggests that Mr Leota had no business of his own; he was solely in the business of Parcel Express.” Putting this test another way – whose business was it? It was clear to the Court that it was not Mr Leota’s.
Implications
The judgment provides important guidance on the application of s 6 of the Act, particularly in owner-driver situations. However, it is also likely to have relevance to other industries heavily dominated by the contractor model, when the reality is that the business is solely that of the principal.
In circumstances where:
- the customers serviced by the ‘contractor’ are customers of the principals, and
- the customers pay the principal, and
- the contractor has very little control over the work
There is a good chance that it is the principal’s business and the ‘contractor’ is, in fact, an employee. If that is the case, the implications will be significant. The person will be covered by the protections in the Act and other employment legislation. Tax consequences may also follow if the person has been miscategorised.
Jim Roberts, partner at Hesketh Henry, has a wealth of specialist experience, having been practising employment law since 1992. He helps his clients, who are from a range of industries, develop their employment strategies around processes including restructuring, performance management and disciplinary action, and managing personal grievances, disputes, human rights complaints, and health and safety. Connect with Jim via email or LinkedIn 
Victoria Bortsova, solicitor at Hesketh Henry, who graduated from the University of Auckland with a BHSc / LLB (Hons). She joined Hesketh Henry as a law graduate in 2019 and was admitted to the Bar in October 2020. Within the Litigation and Dispute Resolution team, Victoria assists with a range of employment and litigation matters. Connect with Victoria via email or LinkedIn
