Article first published in the New Zealand Dental Association (NZDA) News Vol. 212 March 2023.
Owning a clinic usually means you will have people working for you, and it is important you can distinguish between whether they do so as employees or independent contractors.
Last October, the New Zealand Employment Court ruled against Uber in what may be a landmark case, determining four of their drivers to be classed as employees rather than independent contractors. This means that they are entitled to the rights and protections of employees which they had not been subject to as independent contractors. This has returned the spotlight to the debate of having employees or independent contractors.
It may not be as simple or as obvious to define as you may think. It is an important distinction to make however as the rights and obligations for both you and the employee or independent contractor are very different. The obligations you have to employees are much greater as an employer compared to those you have towards an independent contractor.
Employees are granted protection under employment laws such as the Employment Relations Act 2000, Minimum Wages Act 1983, and the Holidays Act 2003. This affords them entitlements to holidays, sick, bereavement, and parental leave and safeguards against minimum wages and salaries. It also ensures that they have recourse to pursue grievances for unfair dismissal or treatment during their employment.
Independent contractors are not covered by these laws and as such are not afforded these entitlements. They are generally covered under common law and therefore rely upon the terms set out in their contract for services or independent contractor agreement.
From a tax perspective, the treatment of employees vs independent contractors impacts all of those involved as it varies between the two.
Tax deductions
It is the responsibility of the employer to make PAYE and any other payroll deductions from employees’ salary or wages and ensure these are paid to the Inland Revenue. The employer must also file all payroll reports.
Independent contractors are responsible for declaring their own income and making income tax payments to the Inland Revenue. However, they can elect into schedular payments, subject to withholding tax deductions which the clinic is then also responsible for deducting and declaring to the Inland Revenue.
Goods and Services Tax (GST)
Payments made to employees are not subject to GST so employers cannot make a GST claim on these costs.
Independent contractors can register for and charge GST, which the payer can then claim back.
Claiming expenses
Generally, employees are not entitled to claim deductions against their income for employment-related expenditure, although some may be reimbursed by their employer.
Independent contractors can claim deductions for business related expenses they incur.
Accident Compensation Corporation (ACC) levies
Employees pay this as part of the PAYE income tax that employers must deduct and pay to the Inland Revenue on their behalf.
Independent contractors are invoiced the levies directly from ACC and are responsible for making payments themselves.
If you are an employer, you hold significantly higher obligations and responsibilities on behalf of your employees, compared to what is required of you on behalf of independent contractors.
It is also clear that it impacts both sides in the working arrangement. It is in both parties’ interests to make the distinction between employee or independent contractor clear so that each party knows what their rights and responsibilities are.
The tests
Simply having an employment agreement or contract for services in place does not draw a definitive line in the sand as to what type of employment relationship there is. While they are a starting point when determining the employment relationship, they can be overturned in light of the real nature of the relationship.
When determining if someone is an employee or independent contractor, there are four main tests that have been developed by Inland Revenue and are applied by the courts to determine what the actual relationship is between the two parties.
1. Control test
What control does the dental clinic exert over the independent contractor or employee?
An employer would usually be in control of what the employee does, including their hours of work and how that work is done. The more control exerted, the more likely the relationship will be seen as that of employer and employee.
Employees tend to have a regimented set of hours and days to be at work and have little control over the tasks they need to perform. Independent contractors however have more freedom to set their working schedules and tend to require less supervision.
In the Uber ruling, an important factor was the control Uber had over the particular times drivers had to work and how drivers were motivated or incentivised. While the drivers were not required to work specific hours, it was determined that not working meant they had less access to information around passenger journeys which impacted their ability to earn money when they were working.
2. Integration into the organisation test
This test looks at whether the work performed by the employee is integral to the employer’s business. A person is more likely to be considered an employee of the organisation if the work is continuous and for the benefit of the business rather than for the benefit of the person undertaking the work.
In a typical employer-employee scenario, the employer would usually provide all of the necessary tools and equipment required for the employee to undertake his or her work tasks. Any work-related expenses would usually be reimbursed or paid for by the employer (i.e. an employer may cover the employee’s annual registration costs or training costs).
Whereas an independent contractor would be left to cover their own costs as this would form part of their business operations including supplying their own tools and specialist equipment where appropriate.
Employees are typically paid an hourly wage or salary regardless of their output (i.e., the number of patients they see), compared with independent contractors whose payments are dependent on results—for instance a commission percentage of the patients they see.
“In whose interest is the work done?” was the main question raised in the Uber case when assessing the extent of the drivers’ integration into the business. This removed the focus from the fact the drivers were providing their own equipment—vehicles.
3. Intention test
A written agreement between the parties can clearly lay out their intentions. The description given in the agreement can be a strong indication of what is intended but is not conclusive. The actual behaviour of both parties cannot contradict this description.
If the written contract labels one of the parties as an independent contractor but the way they are treated by the dental practice is no different to the other employees, then this can negate what is in the written agreement.
The Employment Court highlighted in the Uber case the importance of the practical relationship between the parties over how it was described in the contract.
4. Economic reality (also referred to as ‘The Fundamental Test’)
Is the independent contractor carrying out a business separate from the dental practice? This can easily confirm the intention test, by looking at how both the dental practice and the contractor are operating. An independent contractor is someone in business on their own account. Some factors that would be taken into consideration include:
- What expenses are they paying for (i.e., an NZDA membership, business insurance, managing and paying their own taxes)?
- Are invoices for work being generated for payment to the contractor?
- Is GST being charged and accounted back to the Inland Revenue?
- Are they free to take up subsequent contracts for other dental clinics or does their contract prevent this?
- Lastly, what is common practice in the industry? How the industry operates in real terms is also reviewed and taken into consideration when making a determination.
While the Uber case is important and will hold influence in future employment court decisions, it does not mean that all independent contractors are now deemed to be employees. It is not the first case where the courts have found in favour of employee status over that of being seen as an independent contractor. There are also Working Groups tasked with making a recommendation that clarifies the definition of ‘employee’ to the Government.
Case law has shown the courts will look at the whole picture rather than any specific test when making a determination.
Impacts of getting it wrong
If an employee has been incorrectly defined as an independent contractor, there can be significant monetary implications as the benefits afforded to employees can be back dated. This means that as an employer, you could be liable for the payments of leave, minimum wage, KiwiSaver contributions, and PAYE from the start of your employees employment.
How should your practice protect itself?
Practice owners and dentists should have a clear and agreed understanding of the proposed working relationship. This should be clearly documented to show the ’intention’ of both parties. How each party acts or performs going forward should be consistent with what is agreed to in the document. If the dentist is an ‘independent contractor’ they need to operate as a separate business owner, be registered for GST, pay their own taxes, carry their own business insurance, and provide their own equipment where applicable.
With the Uber case putting the spotlight on the employee vs independent contractor debate, it’s a good time to review the contracts you have in place and review what is actually happening in your practice to see if anything is being contradicted. It’s important you seek professional advice if you are unsure about any of the contracts you have.
