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Businesses or individuals can often make the mistake of assuming they can operate under an independent contractor relationship by simply crafting the contract to reflect that intention.

Clearly there can be advantages for both parties in setting up this type of relationship. For the employer these include not having to withhold tax, provide sick leave or annual leave, and they can typically cancel the service contract within a contractually specified timeframe. For the independent contractor they can claim expenses incurred in deriving income and thereby reducing their tax liability and generally avoid the confines of PAYE.

However, people often do not realise that it is the circumstances of a situation that will determine if a person can in fact operate as an independent contractor. If it goes wrong, there may be severe repercussions. For example, if a person believes he/she is an independent contractor, but based on the facts, the IRD deems the relationship to be that of employment, the IRD can:

•    demand unpaid PAYE from the employer based on grossed up payments
•    disallow expenses claimed by the employee, and
•    charge both parties penalties and interest.

So the question then becomes how do you differentiate between an employee and an independent contractor? Two cases heard by the Taxation Review Authority, and by the same judge, one in 2006 and the other in March of 2009, highlight how difficult this question may be.

The first case related to a self-employed courier driver who used the services of a relief driver. The second case related to drivers used by a nationwide rental car company to relocate their vehicles to its various centres. Some facts from each case are listed below, followed by the verdict of each.

Case A

Relief courier driver
Oral agreement
$125 per day
On an as needed basis
No invoice provided by relief driver
No sick leave or holiday pay
Travel costs are not paid by the driver
Vehicle insured by courier driver (not the relief driver)
Required pick ups and drop offs must be made
Verdict: Casual employee

Case B

Re-location drivers
Standard independent contractor agreement
Typically a fixed per kilometre rate
On an as needed basis
Invoices provided by re-location drivers
No sick leave or holiday pay
Travel costs are not paid by the driver
Vehicle insured by rental company but driver could be liable for excess
Drivers must take the most direct route
Verdict: Independent contractor

Looking at the above factors, it would appear that both cases are fairly similar. Emphasis was placed on the fact that irrespective of how efficiently the relief driver performed, and the wear and tear inflicted on the vehicle, he would be paid the same amount and would not incur a loss of profits, which is indicative of an employment relationship. The converse conclusion was arrived at for the relocation driver. In that case, they were paid by the distance travelled. The amount of profit/loss to them could not be controlled by how the task was completed.

It was not held to be determinative that an independent contractor agreement was entered into by the re-location drivers or that invoices were issued. However, that is a clear difference between the two cases.

A further difference between the two cases is evidenced by the Judge’s view that the relief driver effectively stepped into the shoes of the courier driver and this degree of integration was indicative of an employment relationship. The re-location drivers on the other hand were not an integrated part of the rental car company.

The two cases highlight the pitfalls and complexity of determining whether a person is an employee or independent contractor. When considering whether a worker is an independent contractor or employee, business owners should assess the relationship as a whole. If in doubt, take the time to clearly define the relationship as the consequences of getting it wrong can be costly.

© 2009