Determining Independent Contractor Status Vs. Employee Status In New Zealand

Tests to Determine Independent Contractor vs. Employee Status in New Zealand

The issue in this case is to identify whether William is an independent contractor or an employee

One of the primary cases in relation to determining whetherthe relationship of a person with a business is that of an employer or an independent contractor has been provided through the case of TNT Worldwide Express (NZ) v Cunningham, (1933). In this case whether the person has entered into a contract of service or a contract for service was determined by the court. Here the court had to analyze whether the plaintiff driver was an employee or an independent contractor. It was ruled by the court after analysis that the driver was an independent contractor. Another significant case where the issue has been discussed is the case ofBryson v Three Foot Six Limited, (2005).In this case it was stated by the court that along with the real nature of the relationship all relevant matters were taken into consideration to determine the issue. The factors which were considered in this case were oral and written contract terms, real behavior in contract implementation, control and integration, economic reality and industry practice.  There are five tests which are used by the courts for the purpose of determining whether a person is an employee or an independent contractor (Kiely, 2011). These are control, independence, integration, intention and economic reality test.

According to Section YA1 of the Income Tax Act 2007, an employee is a person who is entitled to or actually receives PAYE income payment. The term employee does not include a person who owns a “look through company” or who has a “look through interest” in a “look through company” other than where he is a working owner. (A look-through company is a tax structure in NZ having limited liability, through which the income and expenditure of the company can be directly transferred to the shareholders)

In the provided situation the five tests are to be employed in order to determine the employment status of William Ross.

Control- In this test the court determines the right of the employer in relation to controlling the way in which work is done. For instance, the right to pay, dismiss or choose the employee. In the given situation William is not required to wear a specific uniform and is only asked to come on time and be dressed in a professional manner. This means he is provided independence and there is no control on what he wears.Restrictions have been imposed on him in relation to acceptance of excessive gifts and being involved in any form of intimate relationship with the clients. In the given situation there is no control on the way he teaches but on his behavior professionally. Thus the control test is not satisfied.He has to attend teaching committee meetings every semester. There is some level of control which is exercised on him. This includes the restrictions imposed on him in relation to how he does his work.  Thus the control test is not satisfied in the balance of probability.

Application of the Five Tests to William Ross’s Case

Integration or organization test- in relation to this test the court determines whether the same work is done in a similar manner by other employees and whether the work is an integral or core part of the business. William is a teacher in an institute thus the integration test is satisfied as his job is of a teacher which is core to the institute. 

Intention test- the few questions which are addressed by the court in this situation are the way in which payments are made and whethersimilar work was done by the person being aindependent contractor in the past. William allowed to teach in other institutes. In this case also the intention test is not satisfied as held in the above cases where it was stated that such allowance is provided to contractors only.

Independence test- The questions which the courts seek to determine in relation to this test are whether all necessary tools required for work are supplied by the employer and does the worker has the right to work for other employers. All teaching materials in William’s situation is provided to him by NZBTC along with other tools and a place to work. As he is provided with such materials he is not independent as per the test of independence discussed above

Economic reality- the primary question in relation to the test is whether the person is actually in business in their own account. He is made to pay for his transport to work as well as for his cloths. He has to account for his own payments and thus the economic reality test is not satisfied. William serves as a substitute teacher on his own. Here also he accounts for his own as per the economic reality test and thus can be said to be a contractor. 

In the courts approach, the following factors are given relevance. ACC levies are not paid for the contractors, sickness or holiday, they are not provided with fringe benefits, they are given tax invoices for GST, and their workload is self-organized.

Taxable income is reduced when a person converts from an employee to a contractor as they are provided additional deductions for claimed expenses. Thus, in their approach IRD are very vigilant.

Conclusion

1. Control- The control test not satisfied on the balance of probability as William is sometimes an employee and mainly that that he is a contractor
2. Integration- the integration test is satisfied that William is a contractor
3. Independence- the test signifies that William is a contractor
4. Intention- the test clearly depicts that William is a contractor
5. Economic reality- The test has not been satisfied William is a contractor

Therefore, through the application of the test, the provisions of the precedent cases, and the IRD’s approach, it can be stated that on the balance of probabilities,William is an independent contractor of NZBTC and not and employee.

• When incomefrom employment sources is assessed for income tax purposes there is no deduction allowed from the income. However in case of an independent contract deduction can be made by showing the expenditure incurred for the purpose of gaining the income.
• It is the duty of the employers to make PAYE deductions from the salary of the employees for those taxes whom are to be deducted. On the other had there is no such obligation which is imposed on the employers in relation to independent contractors.
• The employees are not required to register for GST as salary earners cannot claim GST in relation to services related to the employment. On the other hand,independent contractors have to register for GST where certain criteria are met.
• Employees are not required to make payments for ACC levies. On the other hand, it is the duty of the independent contractor to ensure that they pay ACC levies for themselves as well as any of employees.

Income

1. Under CW 62B of the Income Tax Act 2007any income derived by a volunteer as a reimbursement payment for the expenses gained by them is exempt income. Thus, this income of Pam is exempt income (Legislation.govt.nz, 2018).
2. The income of $20,000 from a seldom lottery win will not be treated as a taxable income. This is because in the case of (Reid v CIR, 1985)it had been ruled by the court that “whether a receipt is an income depends on recurrence and regularity. Here the income is a windfall gain.
3. The prize won by Dawn would be treated as an Income as it is a form of payment which has been made in connection of the employment under sectionBC5 of the ITA 2007(Legislation.govt.nz, 2018).
4. The $30000 received by James would not be treated as an income as it would be treated as a capital gain according to the provisions of(Eisner v Macomber , 1919).  This is because through the application of the fruits and tree test (Intention test) as provided in the case it can be stated that he has sold a part of the tree not fruits. Thus, it is a capital gain.
5. Under HA 15 of the Income Tax Act 2007 as Patrice has received fully imputed dividends in which tax has already been paid by the company they will not be considered as assessable income
6. The $36000 received by Kevin will NOT be treated as an assessable income under Public Ruling BR Pub 06/05as a compensation received under section 123 of the Employment Relations Act 2000.

1. The amount will be treated as a deduction under DA 1(b) of the ITA 2007as the car has been purchased for business use. The provisions have also been used in the case of (CIR v Banks , 1978)

• The expenses of $16000 paid as rent for six month period are deductible as they are prepaid for a period of six months and are less than $26000 as provided in 91AAC of the Tax Administration Act 1994Schedule column (legislation.govt.nz, 2018). The provisions have been discussed in the case of (Mitsubishi Motors v CIR). 

1. Under Section DA 2 (2)a person is not allowed to claim deductions in relation to personal use. Thus, the two days which were spent for personal use would not be taken into considerations. The total exempted amount will include the air fare as the primary purpose of the tour is business and the expenses incurred in the days used for the conference and not the total $4500.  The provisions are also discussed in (Mallalieu v Drummond. )
2.  The expenses for insurance premium are deductible as they constitute unexpired portions (Section CH2 and DB 50 of the ITA 2007) which are to be added back as they are from a period of January to September under section FO9 of the ITA 2007.
3.  The expense are not deductible under the provisions of section DB1 (1)(e) of the ITA 2007as they are penalty imposed for non-payment of tax.
4.  The expenses are deductible under the provisions of section DB 62 of the ITA 2007as the amount is equal to $10000.
5. The expense are not deductible under the provisions of section DD8 of the ITA 2007as the expense will be treated as a fringe benefit provided to the top 50 employees.
6. The transaction is not deductible under DB 31 of the ITA 2007unless the bad debt is actually written off.

Bryson v Three Foot Six Limited (2005).

CIR v Banks , 61,236 (NZTC 1978).

Eisner v Macomber , 252 US 189 (1919).

Kiely, P. (2011). Independent contractor vs. employee. New Zealand Journal of Employment Relations, 36(3), 58.

Legislation.govt.nz. (2018, March 3). Income Tax Act 2007. Retrieved from www.legislation.govt.nz: https://www.legislation.govt.nz/act/public/2007/0097/latest/DLM1517683.html#DLM1517683

legislation.govt.nz. (2018, March 2). Tax Administration Act 1994. Retrieved from legislation.govt.nz: www.legislation.govt.nz/act/public/1994/0166/350.0/contents.html

Mallalieu v Drummond. .

Mitsubishi Motors v CIR.

Reid v CIR, 7 NZTC 5,176 (1985).

TNT Worldwide Express (NZ) v Cunningham (1933).