November 13, 2007

Contractor or employee?

Brian’s worker – contractor or employee?

Brian had owned and run a business for nearly twenty years. Recently, he had employed a manager and semi retired to do some fishing.

Brian’s company had contracts to maintain air conditioning units in hundreds of commercial buildings. All the actual work was done by sixteen contractors and only the manager and some office staff were salaried employees. Brian had been employing contractors since he started the business, and had never had a problem with them. He kept a tight rein on them, providing training, tools and materials, and close supervision. If a contractor failed to perform, he was simply offered no more work. That was quite safe if the workers were really contractors, but very risky if they were really employees.

George, one of the contractors, had been away sick. Then he wrote to Brian, claiming that he had been bullied by the manager, and claiming that he was unable to work because of stress as a result. George also claimed that he was really an employee rather than a contractor and was consequently protected by the Employment Relations Act because the “contractual relationship” between him and Brian was a sham.

Brian wasn’t worried. He had engaged contractors for years. He knew George was a contractor. It said so on the contract they had both signed. Even though Brian’s company paid GST on George’s behalf, George paid his own income tax and paid his own expenses. Bloody nonsense! And as for the bullying – Harden up! If you can’t stand the heat, don’t work in the kitchen!. Go work for someone else!

Brian wrote a letter to George telling him pretty much that. George didn’t reply to the letter, but returned all the company tools and filters and spare parts Brian’s company had provided. He didn’t show at work the next day and when the manager rang him, George said he was “finished”. Brian heard on the grapevine that George was working for another firm.

More Trouble
A month later Brian got notification from George’s lawyer of a Personal Grievance for Unjustified Disadvantage in relation to the bullying and for Unjustified Dismissal by way of Constructive Dismissal in relation to Brian’s unwillingness to address the bullying and his “get out of the kitchen” comment. George was seeking a large settlement, including three months wages and $15000 for hurt and humiliation.

Call an advocate
Brian was reasonably sure he was on safe ground in relation to George being a contractor, but after a quiet word with a couple of the other contractors, he was having second thoughts about the allegations of bullying. So he called me. “You’re about half the price of a lawyer, and this should be simple” he informed me bluntly.

When I started to investigate, it wasn’t simple. The manager believed he had been “hard but fair”. He had certainly regularly sworn at George and abused him personally, “ridden him pretty hard”, and often teased him about “all sorts of stuff”.

Regular and relentless teasing about personal appearance, dress sense and choice of vehicle might or might not be bullying, but personal abuse and putdowns and the sort of micromanagement the manager admitted to certainly were.

The contractor/ employee question wasn’t simple either. The Employment Contracts Act which was the relevant legislation up until 2000 classified people as contractors pretty much on the parties’ say so and on whether PAYE was deducted from money paid over. In 2000, the Employment Relations Act changed the way that the relationship between an employer and a contractor/employee was viewed. George might well be regarded as an employee and entitled to raise a grievance.

The Legal Situation

The first question was whether George was an employee or a contractor in terms of being able to raise a PG. The Employment Relations Authority would determine whether George had been an employee and only consider a PG if he was.
As well as the light that taxation compliance issues like PAYE and GST would shed on the nature of the relationship between George and Brian, the Authority would consider :

  • Whether George and Brian intended to be in an employment relationship
  • The level of autonomy George exercised in his day to day activity
  • Whether George was able to control and profit from his own business decisions
  • Whether George could refuse work or work for other people as well
  • Whether George could set his own rate and price his own jobs
  • Whether George could set his own working hours
  • How much and what level of direct supervision George got
  • Who owned the tools and equipment
  • Who supplied the materials to do the maintenance
  • Who arranged and paid for George’s training

Brian and George had signed a Contract for Service acknowledging that George was an independent contractor, and not an employee, but on pretty nearly all the rest of the criteria, the Employment Relations Authority was likely to regard George as an employee.

So a Personal Grievance was likely to be accepted, and the managers personal abuse and putdowns clearly constituted bullying. If Brian had acted to investigate George’s complaint straight away, he might have been able to argue successfully that he had taken all reasonable steps to act as a good employer. The fact that he did not meant that George’s claim for unjustified disadvantage was likely to succeed

Brian’s failure also made it reasonable for George to conclude that Brian was never going to protect him from bullying and to believe that he had no option except to quit. George’s lawyer would undoubtedly argue that Brian should have forseen that his actions would cause George to quit and that George had been constructively dismissed as a result.

First steps
Brian needed to estimate the risks to his business.

George’s grievance was relatively minor. If George were found to be an employee and the Authority found in his favour on the unjustified disadvantage and the constructive dismissal he could expect $5-6000 for hurt and humiliation and up to three months wages (depending on how long he was out of work before finding another job). Since Brian knew that George had walked straight into a better paid job as a service manager for a rival firm, there would be no wages payable. So in relation to George’s PGs, Brian’s downside risk was $6000 plus some of George’s legal costs.

In relation to the other contractors, his risks were frightening. If George was an employee, so were the other fifteen “contractors”. What about the tax liability? Who else had the manager bullied?

It was clear that Brian needed first to settle with George.

Then he needed to deal with the manager he had employed, and make sure he received training about bullying. The manager clearly needed to learn what behavior was appropriate and what was not.

Then Brian needed to review and alter the processes and procedures by which his company priced work and managed the contractors to ensure that a genuine Contract for Service existed, and that the maintenance contractors were truly independent contractors and not employees.


I negotiated with George’s lawyer on Brian’s behalf. It was clear that an apology was required, along with a s123 payment for hurt and humiliation. We offered that apology, along with a s123 payment of $2000. No deal. Negotiations stalled. I was not quite connecting with George’s lawyer and it was clear that I was missing something. Since the Employment Relations Act specifies that all communication must go through a representative once one is appointed I was not permitted to talk to George directly.


So we went to a mediation with the Employment Relations Service. That worked much better. George told his story of bullying and harassment, of daily teasing and abuse, of feeling like a fool and having his work nitpicked , of not wanting to come to work, of sleeplessness and worry, of waking up anxious and throwing up before breakfast every day. As he told his story, George was tearful. I believed him. So did Brian.

Brian was devastated. He had had no idea what had been going on in his absence or how badly George had been affected. He wanted to put things right. He apologised again, and offered $5000 for hurt and humiliation. No deal.

I gradually understood that it wasn’t the money George wanted, and that an apology from Brian cut no ice. I suggested we take a break and get the manager in. We did, and even though Brian was very angry with the manager I persuaded him to let me handle the situation.

When the manger arrived, I explained to him that the mediation process was confidential and “without prejudice” and that any admissions he made could not be used against him or Brian’s company. I told him it was important that he should listen to George’s story and that it would be helpful if he was able to make an honest response to it.

When the mediation resumed, George repeated his story. The manager was at first defensive and dismissive, but then George started to shake and cry. The mediator wanted to stop the session, but I persuaded everyone to let it go on. As George continued to speak about how it had been for him, the manager started to get very uncomfortable and began to acknowledge what he had done and to make increasingly sincere apologies. The effect on George was magic.

Like many victims of workplace bullying, George had badly needed to be listened to and believed, and to have his experience and suffering acknowledged and validated. Once the manager admitted that these things had happened, and that he was in the wrong, George felt vindicated. Once the manager said that he was sorry with every appearance of sincerity, the dispute was easy to settle. George accepted the $5000 and the apology.


The manager was very eager to have some training around communication, interpersonal relations, and the management of staff. I organised that quickly, and the manager participated enthusiastically and seemed to learn a lot. He certainly changed the way he related to staff.

Reviewing and changing the policies and procedures to manage the contractors differently took a little longer. The system I helped Brian design ultimately ensured that the contractors:

  • acknowledged they were free to refuse work
  • acknowledged they were free to contract to other firms
  • arranged and paid for their own training
  • estimated and priced their own jobs
  • determined their own working hours
  • supplied their own tools and materials
  • performed the work to quality standards specified in the contract
  • submitted their own invoices
  • paid their own GST

They operated with much more autonomy than before, and once the new system was up and running, all of them preferred it. The manger found that he did not need to supervise the contractors so closely, since they were working to clearly specified standards, and he no longer needed to keep track of hours they worked. He used his time to grow the business and soon had to employ more contractors. Brian got to do some serious fishing.