Gig what? Business gains are possible, but caution required

The ‘gig economy’ is a free market system, in which businesses often use independent workers for short-term contracts. Independent workers may not work exclusively for the contracting business, and may hold more than one engagement at a time, with different contractual terms attaching to each engagement. Payment terms are negotiated by the parties and may be made on an hourly or output basis.

Changes in the manner the economy is operating have been coined by academics as an ‘industrial revolution’ – specifically the ‘Fourth Industrial Revolution’ (FIR). Changes include a blurring of lines between the physical, digital, and biological work spaces – collectively referred to as cyber-physical systems. Business practice has subsequently evolved, particularly around tendering services, to take on roles that may have been geographically and/or financially prohibitive in the past. Think Uber, Air BnB and other service platforms.

In order to effectively harness the gig economy within the FIR, businesses need to understand what the risks are when attempting to create short-term contracts and/or part-time fixed-term roles.

Employment lawyers considered some of the various difficulties relating to the gig economy at the Employment Law in a Time of Change Conference in October 2018[1]. Amongst other things, the benefits and disadvantages of the gig economy for the parties were discussed.

Individual improvement?

Flexibility appears to be a prime reason for becoming an independent contractor. Contract or part time work enables individuals to pursue other interests in the regular 8:30am-5:00pm Monday to Friday time frame. The downsides to being an independent contractor include: unsteady workload and pay cycles; lack of employee benefits including ongoing sick and annual leave; and lack of grievance protection, ongoing education and other benefits such as insurance.

Business bonus?

The Employment Relations Act 2000 (the “Act”) defines employees in section 6. Once someone becomes an employee, regardless of whether their employment is permanent, fixed term or casual, they are entitled to minimum rights which include guaranteed wages, annual holidays and leave and a right to bring a personal grievance. Once incorporated into operating costs, these rights inherently increase the operational costs of a business.

Businesses effectively using the gig economy can reduce operational costs by side-stepping employees, and entering into a contract for service with an individual. However, the manner in which they do so needs to be carefully considered as an incorrect approach can lead to a costly outcome.

For example an individual who is engaged as an independent contractor (a contract for service) may bring a claim to the Employment Relations Authority (“ERA”) alleging that they are, in fact, an employee. If the ERA determines that the individual has been engaged as an employee as opposed to an independent contractor, the business will likely face significant arrears payments and penalties. Businesses need to critically consider what type of contract the individual should be engaged with, and be able to evidence that they are not an employee for the purposes of the Act[2].

The Supreme Court in Bryson v Three Foot Six[3] confirmed that when determining whether a contract is ‘of’ (employee) or ‘for’ service (contractor), all relevant matters should be considered including the terms and conditions of the contract, the manner in which the contract operated and how the traditional common law tests for distinguishing between an employer and employee are applied.

The common law test includes a review of:

1. Control: how much discretion does the individual have to carry out the role with regard to timing? Is the outcome the focus of the relationship, or is the process to the outcome dictated by the business? A contractor may make themselves unavailable on certain days, and normally will have autonomy as to how the job should be completed without supervision and direction.
2. Integration: is the individual ‘part and parcel’ of the business, contracted directly by the business, attending team events and wearing the company uniform? A contractor will normally supply their own clothes and tools and will sit outside of the day to day business operations.
3. Fundamental/economic reality: does the individual act in business on his or her own account? Do they advertise and subsequently invoice for provision of their services? Have they set up their own company with a GST number (where fees are in excess of $60,000.00)? Do they provide guarantees and indemnities? An employee will receive a wage with PAYE and ACC deducted.

We recommend that businesses consider the needs of their business including their end user and any known business problems when determining what type of contract is a best fit for their business.  Legal advice around how to structure a work force that addresses these needs through well drafted contracts is critical.

Triangular Agreements- Risk and Change

The gig economy has also seen an increased need for short term contracts for a mobile work force. Businesses, in searching for flexibility, use recruitment agencies to successfully provide temporary labour. The relationship between the business/employer, agency and the worker are often covered by third party or triangular agreements.

Historically some employers used triangular agreements to sidestep their legal obligations to temporary staff, resulting in lower operational costs. E tū sought to stop such arrangements, when they took on a case of two employees engaged via a triangular agreement in Prasad v LSG Sky Chefs[4].

The triangular agreement, and obligations owed by the parties to the agreement, were explored by the Employment Court and Court of Appeal. The Employment Court held the workers were employees, for the purpose of the Employment Relations Act 2000, despite not holding an employment agreement.

The Court held the lack of an agreement was not indicative, and when addressing the common law test stated at [96]:

The reality is that (amongst other things) the plaintiffs had no control over the way they did their work; they had no control over where they did their work; they had no economic interest in the way in which the work was organised; they were subject to the strict direction and control of LSG supervisors at all times; they did not work as individuals; they had no say in the terms on which they performed the work; …; they were fully integrated into the LSG business and they had no other real source of work.

The Court of Appeal declined leave to appeal, and noted that, “much will depend on the particular facts of the individual case and an analysis of the real nature of the relationship, including how in operates in practice”.[5]

Before the Court of Appeal decision, the Employment Relations (Triangular Employment) Amendment Bill (“Bill”), was introduced to Parliament. While there have been recommendations for amendments to the Bill, including from MBIE around the definition of primary and secondary employer, the current purpose of the Bill is twofold:

1. The first is to ensure that employees employed by one employer (the primary employer), but working under the control and direction of another business or organisation (the secondary employer), are not deprived of the right to coverage of a collective agreement covering the work being performed for that other business or organisation.
2. The second purpose is to ensure that such employees are not subjected to a detriment in their right to allege a personal grievance by providing that where an employee is employed by a primary employer, but working under the control and direction of a secondary employer, that employee may join the other business or organisation that is party to any personal grievance action. Such joinder requires the leave of the Authority or the court.

Both the ability to bring a personal grievance, and the passing on mechanism enabling access to a collective agreement will likely increase costs for businesses as the rights and benefits of the worker increase.

The Bill has had its second reading before the House of Representatives, and will now be heard before the Whole House.

Businesses using recruitment agencies to provide a mobile workplace need to consider the common law tests[6], and possibly the points raised by the Employment Court. We remain ready to provide advice on situations that may not be clear cut for both employees and employers, and to assist in the drafting of contracts that mitigate potential risks.

[1] The author acknowledges and refers to the paper presented by Simon Mitchell and Philip Skelton QC titled: The Boundaries of Employment: Triangular Employment, The Gig Economy and the Changing Nature of Work.

[2] See note 1 above.

[3] [2005] 3 NZLR 721 (SC)

[4] (2017) 15 NZELR 178 (EmpC) and LSG Sky Chefs v Prasad [2018] NZCA 256

[5] Prasad v LSG Sky Chefs (2017) 15 NZELR 178 (EmpC) [98]

[6] The common law test is set out above.

This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.