Contractor vs Employee: Why NZ is proposing a gateway test

Published 20 September 2024 | 2 min read

New Zealand’s employment laws are facing significant pressure to keep pace. As technology advances and business models shift, grey areas in the legislation are becoming more apparent, especially around whether workers are employees or contractors in the Employment Relations Act 2000.

The distinctions between these roles can have serious implications for businesses, and as the landscape continues to change, so too must the law. However, keeping up with these changes is not always straightforward, leaving businesses to navigate uncertain waters.

The Uber case

One prime example of this uncertainty was the high-profile Uber case, where four drivers challenged their status as independent contractors. The court ultimately ruled that they were employees, setting a precedent that rippled across New Zealand's gig economy. This decision raised alarms for businesses relying on contractor arrangements, creating confusion and uncertainty. If workers traditionally seen as contractors could now be considered employees, many businesses would need to reassess their entire operational models. It became clear that a more precise legal framework was necessary, prompting the New Zealand Government to act.

Proposed gateway test

To address this, Workplace Relations and Safety Minister Brooke van Velden announced a new "gateway test" to be introduced as part of the Employment Relations Act. This test aims to clarify the distinction between employees and contractors and offer businesses more certainty in structuring their workforce. The gateway test sets out four clear criteria, and if a working arrangement meets all of them, the worker is considered a contractor. These criteria are:

1. A written agreement specifying the worker as an independent contractor.
2. No restrictions preventing the worker from working for another business, including competitors.
3. The worker is not required to be available at specific times or for a minimum number of hours. Alternatively, the worker can subcontract the work.
4. The business cannot terminate the contract if the worker declines an additional task or engagement.

If any of these conditions are not met, the existing legal test under the Employment Relations Act 2000 would apply instead.

Current legal test

Under the current framework of the Employment Relations Act 2000, the courts use several tests to determine whether someone is an employee or contractor. These include:

• The intention test: This assesses the nature of the relationship as intended by both parties, usually based on the written agreement.
• Control vs independence test: The more control the business has over the worker's duties, hours, and methods, the more likely the worker is an employee.
• Integration test: This looks at whether the work is fundamental to the core activities of the business.
• Economic reality test: This considers whether the worker is genuinely operating as a business on their own account.

While these tests are comprehensive, they can be subjective and leave room for interpretation, leading to uncertainty for both workers and businesses. The new gateway test is designed to provide a clearer, more consistent approach.

Minister’s perspective

Workplace Relations and Safety Minister Hon Brooke van Velden emphasised that these changes are crucial for modernising New Zealand’s employment law to better reflect today's diverse working arrangements. She acknowledged the rising costs and business uncertainty caused by disputes over employment status, particularly those that end up in court.

“These changes will provide businesses with more certainty to proceed with innovative business models involving contractors," she said.

Van Velden also highlighted the importance of maintaining flexibility in contracting arrangements, especially in industries where gig and freelance work are common.

Furthermore, she reassured businesses that the new test would not hinder their ability to offer competitive terms to contractors.

“It will enable businesses to offer better terms and conditions to their contractors with less concern that it might impact the contractor's status,” she noted.

Step toward clarity

By introducing a more straightforward test, the government hopes to streamline the process of determining worker status and reduce the risk of litigation.

For businesses, this means greater confidence in structuring their workforce, whether employing traditional staff or engaging contractors. While the changes are still to be introduced in the Employment Relations Amendment Bill, they promise to bring much-needed clarity and certainty to New Zealand's evolving employment landscape.