Long hours, low pay, and no say: many workers are missing out on basic rights and protections as a result of being misclassifed as contractors. A government working group has suggested reforms to fix the problem, writes Rebecca Macfie.
On paper, Auckland builder Ross Barry was a self-employed contractor, in business on his own account. If the label was accurate, he would have been free to shop his skills around different clients, set his own rates, take entrepreneurial risks in pursuit of profit, and eventually have something of value to sell.
In reality, as for many so-called ‘contractors’, Barry had no control over his time or work. He put in 40 hours a week for one company, C I Builders, was told what to do and when to do it, and was paid an hourly rate of $35-$36. When he was sick or took a holiday, he didn’t get paid. There was no opportunity to make a profit, and no business for him to sell.
“He was not, in reality, operating a business on his own account. Rather, he was working for CIB in CIB’s interests.”
– Chief Employment Court Judge Christina Inglis
As Chief Employment Court Judge Christina Inglis concluded in a case determining Barry’s employment status last June, “he was not, in reality, operating a business on his own account. Rather, he was working for CIB in CIB’s interests”. That meant he ought to have been receiving all the legal entitlements of employment, including annual and sick leave, bereavement and parental leave, Kiwisaver contributions, and the right to bring a personal grievance if he was sacked without cause.
Dodgy contracting arrangements like Barry’s are endemic across the economy. They are common in construction, where even teenage apprentices are frequently taken on as self-employed contractors, outside the protection of the minimum wage and responsible for their own ACC and tax, but in reality working entirely under the control of the employer.
Contracting is at the heart of the courier industry’s business model, and is widespread in forestry, agriculture, cleaning and telecommunications installation.
Consultation by MBIE in 2020 showed that people in such sectors commonly sign up as contractors with no idea what they will be paid nor any real understanding of the risks, having been “sold a dream”. Three-quarters relied on one client company for all or most of their income.
Over half of contractors surveyed by MBIE had no opportunity for negotiation; contracts were put forward on a take-it-or-leave it basis. Some took on big debt to buy the equipment needed, only to find their contract didn’t enable them to earn enough to live on.
Periodically, workers like Barry come before the Employment Court seeking a determination they are an employee, not a contractor, and therefore entitled to employment protections.
Chief Judge Inglis made an equally emphatic ruling in 2020 in the case of courier driver Mika Leota, who worked exclusively for one ‘client’, Parcel Express, which told him where and when to work, what type, colour and size of van to have, and what to wear. Leota, a migrant worker who spoke English as his second language, was told he was his “own boss”.
The judge ruled this was nonsense: “I do not have any difficulty concluding that Mr Leota was not in business on his own account. Mr Leota was an employee of Parcel Express.”
However rulings like this are one-offs, based on their specific facts. Both the Leota and Barry cases were significant decisions that have not been challenged, but nor have they had any flow-on effects on the prevailing pattern of work in the courier and building industries.
A tripartite working group including Business New Zealand, the Council of Trade Unions and government officials has been considering the problem of vulnerable contractors since last May, and its report was released before Easter.
Among its recommendations to Workplace Relations and Safety Minister Michael Wood is a proposal that court decisions on employment status should extend to other workers doing similar work for the same entity, even if the decision relates only to one of those workers.
The group also wants consideration given to whether groups of workers should be able to seek court rulings on their employment status, and has raised the idea of allowing regulators to rule on employment status without waiting for an individual worker to file legal action.
The implications would be significant, not least for the courier industry, where the contractor model is deeply embedded and has been staunchly defended by the major companies. Auckland lawyer Garry Pollak, who acted for both Leota and Barry, has had to withdraw two cases on behalf of courier drivers just in the past few months after the drivers were paid eleventh-hour settlements by their ‘client’ companies.
Business NZ’s Paul Mackay, who sat on the working group, says the recommendation falls short of calling for class actions to determine employment status. Rather, “it’s a limited form of class action, where if the facts can be applied to one person in a company then the probability is that those facts are equally applicable to others doing the same work and therefore should be applied”.
He says more detailed work needs to be done on the legal mechanism for this. But he agrees the courier industry may be alarmed at a recommendation that would disrupt its business model.
“If you look at Aramex, for instance, where they have clearly had troubles applying their model and now are having to resort to things like top-up payments to match what the business model expectations were in the first place…It will force some rethinking.”
Another key working group recommendation is a rewrite of the legal definition of ‘employee’ in the Employment Relations Act. It wants a “brighter line” distinction between someone who is clearly working in the interests of an employer, and a person who is genuinely running an independent business in which they are free to contract to whomever they like, organise their own affairs, and generate gains that accrue to their own firm.
It says apprentices – who are subject to “widespread misclassification” as contractors – should be explicitly included in the definition of employee in the statute.
The group heard first-hand experience of contractors, workers and businesses that use the contracting model, and reached a high level of consensus that there is a problem with workers being misclassified as contractors. In its report to Wood, it said that where contracting is normalised in an industry, individual workers are “usually powerless” to challenge the practice.
In sectors like courier delivery and residential construction, the possibility of workers being engaged as employees rather than contractors is “not seriously entertained by most businesses”.
It found that in many contracting arrangements risk is shifted from the hiring company to the individual contractor. Courier drivers, for instance, sometimes have to pay to replace goods that are rejected by the customer, and contractors in residential construction often have contracts that can be cancelled without compensation. Many contractors entered into deals only to find the hours were much longer, and income much less, than touted.
The report describes the use of standard-form contracts that disproportionately favour the hiring company, including termination without notice clauses, strict restraints of trade, the ability of the hiring company to alter the terms without notice, and obligations on the contractor to purchase core supplies from the hiring company.
Many people told the group that the “flexibility” of being a contractor had proven illusory.
The core problem, concluded the working group, was that contracting was being used in ways that undermined New Zealand’s “labour market objectives – which are to ensure decent work, and promote high quality, highly productive jobs, with better pay and conditions.” The upshot is contractor incomes that are often below the minimum wage, contractors burdened with risks and compliance costs they are not equipped to bear, long hours to meet contract requirements, inadequate breaks and inability to take time off for holidays and sickness.
Principals have a “high degree of control” over contractors’ time and working arrangements, raising the possibility that in some industries there is “serial misclassification” of workers as contractors.
“The ‘long hours, low pay’ (below minimum wage) dynamic that is prevalent in some contractor-dominated industries suggests that labour markets, in their current guise, are not directing labour to its most productive uses,” said the group. Furthermore, this low pay model “externalises” some costs onto society through welfare and health spending.
As well as making the employee/contractor legal distinction clearer and more enforceable, the group suggests a number of steps could be considered to reduce the power imbalance between contractors and principals. These measures could range from pre-contract disclosure requirements and industry codes, through to removing the barrier to collective bargaining for contractors.
The group acknowledges there is a risk that tightening the laws around contracting and stemming the incidence of worker misclassification could simply push the problem into other forms of precarity, such as labour hire and casual work. “The Government should complete further work to ensure that these other types of non-standard work are regulated appropriately.”
Wood said in a statement to Newsroom that a set of proposals would be drawn up for public consultation later in the year.