Helen White, Barrister, spoke at a public seminar in Auckland in May 2012 on
the topic,” Contracting – good for business and/or employees?” These are her
notes from that presentation.
Use of ‘contracting’
Adrian Merritt (Brooks in later articles) in the article referenced in Bryson,
describes employment law as providing a cloak of protection to employees
because they are recognised as vulnerable. They have minimum terms and
conditions, pay rates and holidays and rights.
Contracting has become the most serious means by which the protections
built up are avoided and eroded.
This happens in several different ways:

Businesses engage so called “independent contractors”, often with a
demand for a far greater degree of control and economic dependence
than Weta Studios demanded of Mr Bryson.

Businesses contract out or change to a new contractor primarily
induced by the savings resulting from reducing terms and conditions.

Businesses threaten contracting out at negotiations with employees to
reduce bargaining power (Ports).
The use of contractors is on the rise worldwide. No wonder, given an
enterprise can shift the risk to the contractor and can contract out of
obligations they would have to an employee doing the same work.
The Negative Consequences
It is possible to see very negative consequences for society and particularly
workers caught up in it.

The contractor who officially becomes the employer or “subcontractor” is completely beholden to any instruction of the principal to
dismiss or instruct the employees. They terminate an employee or
extinguish a contract without any good reason.

The individuals labeled contractors are often stuck in contracts that
make them powerless. They invest in expensive equipment that can
only be used for a single purpose and agree to restraints and clauses
that allow unilateral deduction from payment or rate. These features of
many agreements make them more vulnerable than employees and
often result in payment of less than the minimum wage.

These contractors will work unsafely to make ends meet. They will
drive the courier van with bald tires. They will work long hours.

The constant movement from contractor to contractor to ‘meet the
market’ means a constant downward spiral of money for low paid
workers. Workers with specialist skills can resist this but in a down
turn the market for less skilled workers is actually pushed down to
below minimum wage by the use of subcontractors.

Businesses retain all the advantages of employing people when they
control them so they cannot work for competitors and cannot grow a
business. We destroy productivity because we are not encouraging
small businesses but creating an underclass of workers who go into
this because they cannot gain employment for a variety of reasons.

The business who employees is disadvantaged by competing with the
business who avoids all compliance costs of employment by use of
contractors.

One view of what is going on is that it amounts to tax avoidance.
These dependent contractors are not paying as much tax as an
employee dong the same work. I suspect there is widespread default
and avoidance among this group.
The Response to the Excesses
The legislature has attempted to react to it excesses by amending s6 and
Part 6A “vulnerable” workers protection after a spat of contracting out
services and caused a decline in real wages and terms and conditions of the
already low paid work. Remember Tempo and all the CHEs that contracted
out cleaning and catering and transferred employees only to have many of
the new employers go into liquidation.
The steps taken were haphazard although it is argued these tools have not
been used to their potential affect.
Factors preventing the development of this case law on s6.
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Tax implications for workers involved. Despite the vulnerability of
wayward principals in this regard there is real risk to workers who
challenge their status. It also feels like that to claim depreciation on a
vehicle and to challenge your status afterward is to have your cake and
eat it.
-
These workers are truly vulnerable – they are the very people who signed
up to these deals – they are often attracted to being self-employed and
are gullible. They take on a “business” where they must buy equipment
and are locked in exclusively. When they leave they are beholden to the
Principal. They often do a deal where they sell the equipment back to the
principal or the next contractor but if they make a fuss they quite often
face financial oblivion.
-
At present contractors are outside the ambit of unions at a time when
unions are politically weak and defensive.
LEGAL UPDATE
There have been movements on several legal fronts.
Section 6 ERA 200
The Supreme Court has only had Bryson before it. Its control factors are less
severe than those described above - Why have we not seen the re-litigation
of the courier case in Cunningham?
Here are some examples of the controls enterprises regularly require on
contractors and their workers that make the workers vulnerable because they
erode independence.








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

The right to direct all workers performing the work.
The right to manage the way the work is carried out in minute
detail.
The obligation of all workers to work exclusively for the enterprise.
The right to veto hiring.
The right to suspend workers.
A restraint on all workers from working for a competitor during or
after employment for some months.
The obligation of workers to extend the enterprise’s business and
pass on that business to enterprise.
The ownership of all information by the enterprise.
The control of worker’s equipment, which cannot be used for any
other purpose.
The control of the amount of money paid, which can be decreased
or increased without further agreement.
Flat rates during set hours, so that no matter how much the
“contractor” does he cannot increase his earnings.
No Need to Prove a Sham
We know from the plain words of the law and from Bryson that intention is no
longer definitive.
It is no longer necessary to prove a sham, just that in reality the workers are
not in business on their own account. This may mean dependent contractors
of the more extreme variety are protected even if they intended to be
contractors. Likely are the ones who have restraints on working for others and
where control is exercised by the principal.
Ratio of Bryson- Independence Critical
I am of the view that despite the application of many different tests by the
Supreme Court Bryson invites any legal challenge to address the following
issue - Independence: is the person in business on their own account? Is the
person running the risks making the profit? The sad reality is many are
running the risks without hope or control over profit.
Autoclenz Limited v Belcher [2011] 4 All ER (11) 745
This is a recent case of the Supreme Court in the UK. This is important as it
does indicate the same wind is flowing through similar jurisdictions.
Car cleaners were described as sub-contractors but found to be employees.
The contracts said that the workers had the right to substitute themselves
with another (this usually dooms an argument that the relationship is one of
employee) but the reality was found to be different. The significance of this
case is that the UK also asks itself… what is the true agreement between the
parties? And specifically takes into account the imbalance in bargaining
power when the agreement is made.
Applying it to former employees who are offered a contract with their former
employer to provide services this may impact on the weight given to intention
– what about Chorus contractors for example?
Vulnerability of Contractor’s Employee to Whim of Principal
Autoclenz and McDonald (described below) may be relevant when such
conditions exist as described above and when the enterprise threatens to
terminate the contract if the contractor does not remove a particular worker it
inevitably leads to the termination of the employment of the worker. The
contractor has no other place to put them and can’t afford to lose the contract.
These workers have a lawful obligation to work exclusively for the enterprise
but miss out on the cloak of protection the law provides employees, despite
being just as unjustly treated.
Arguably such workers, “tied hand and foot” to the principal are employees .
This approach was used to determine that workers were employees in Narich
(Privy Council) followed here in Mutual Providence Society v Government
Actuary (1986) 1 NZELC 95,228( a case taken by the tax department in
Australia which found workers were employees on this basis.)
There is case law to suggest that it is possible to have more than one
employer and this avenue has yet to be explored.
Where are we at with the use of an intermediary labour hire contractor?
McDonald v Ontrack Infrastructure Ltd and Allied Work Force Ltd [2010]
NZEMPC 132
This was a full court decision. Mr McDonald claimed the real relationship was
one of employment despite having been contracted via Allied.
The argument was about whether s6 applied to the principal. The Court
emphasise that it is a matter of fact under section 6 and told the parties they
need to establish the facts further before a ruling could be made but stated
that it was open potentially for Mr McDonald to argue he was employed by
“an entity at the third point of the triangle that is by a person who was not
originally his employer but with whom his employer had a commercial
relationship which included the exclusive provision of the employee’s services
to that third party.”
Movement towards Finding Obligations towards Dependent Contractors
Independent Contractors who are not likely to be found to be employees must
access a system that is so expensive it is usually prohibitive.
Olsen Consulting Ltd and others v Goodman Fielder
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Example case of success in High Court see the case of Olsen Consulting
Ltd and others v Goodman Fielder NZ CIV 2011-404-5622.
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These contractors deliver goods and buy runs. They sign an agreement
allowing unilateral review of their remuneration. They sued saying the
power had been arbitrarily applied and insufficient notice given of
reduction.
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GF had to consult first– a concept implicit in “review”.
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Justice Keene said the power of unilateral review must be only be
exercised to ensure the Commission GF paid under its costing model
calculation was or remained accurate. It was not entitled to vary the
costing model.
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It also had to consult and give notice of any change commensurate with
the seriousness of the change.
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While I am not civil lawyer and it may all turn on its facts it did sound as if
the ideas of consultation and restriction on unilateral power were concepts
adopted in response to the dependency of these contractors.
Challenge that Clauses designed to protect workers against Contracting
Out are anti-competitive
In 2010 NZ Steel took a case in the High Court claiming that the clause in the
collective agreement that committed the employer to paying the same terms
and conditions to any contractor was anti-competitive and breached the
Commerce Act. This was eventually settled but it demonstrates the way many
people see these protections. They see them as artificially propping up wages
and distorting the market rate.
Where are we at with use of contracting out work as a way of driving
down terms and conditions?
It is still legitimate to contract out work (unless there are such protections in
the agreement as were in the NZ Steel agreement) in order to achieve
savings by freeing the current employer from its current obligations to pay
specific terms and conditions, except for what we all called “vulnerable
workers” until Judge Travis pointed out there is not such terminology in the
ERA.
“Vulnerable Workers”
The case of Matsuoka v LSG Sky Chefs Ltd [2011] NZEmp C 44 suggested
that employees working some catering services in a mixed role were
protected under the Part 6A subpart 1 because they were workers who
provided services described in Schedule 1A.
A new case (Lend lease Infrastructure Services (New Zealand) Limited v
Recreational Services Limited) has just been heard in the Employment Court
with regard to the contracting out of workers who maintain the city parks. The
current contractor argues that these workers also have such protection.
These employees are caught in the same use of contracting to drive down
terms and conditions. The Council re-tendered. The new contractor could
offer lower wages than the old contractor, who had taken on the terms and
conditions of the employees, who were formally employed directly by the
Council. They presumably bid less and I argue had a competitive advantage
over the old employer.
The new contractor argued that it was not liable to take these workers (and
the liabilities for annual leave etc). A recent interim ruling in the High Court
has said the legislation fails to oblige the prior employer to transfer any of the
contingent or real accruals like redundancy pay or holiday pay to the new
contractor.
Lend Lease and the union argued the workers were cleaning the parks and
provided cleaning services.
Both the Council and Recreational Services argued that they were not
providing cleaning services and to interpret Matsuoka in this way it would
open the floodgates to the protection of any worker who ever cleaned – e.g.
the policeman who cleans up after an accident etc.
This case is likely to go to the Court of Appeal whatever way it goes.
Using Contracting Out Threat in Bargaining
The Court has intervened on the Auckland ports with some real affect on
industrial relationships.
In his interlocutory judgment [2012] NZEmpC 54 Judge Travis insisted the
Ports of Auckland stop all progress to contracting out work while bargaining,
as this was likely to undermine the bargaining and probably already had.
One of the claims in that bargaining was that the Ports would not contract out
during the term of the Collective Agreement, given the obligation to bargain in
good faith for a Collective Agreement.
I had understood the ratio of NZEPMU v CHH [2002] 1 ERNZ 597 to have
addressed this and allowed parallel paths of restructure (contracting) and
claim to prevent contracting in the bargaining but here Judge Travis has
found it was not raised in that case and the fear of contracting out can
undermine the bargaining. This does seem common sense.
There was also an argument the Ports actions were not “active and
constructive” in the proposal to contract out work. The Judge notes it only.
This seems a weaker argument as any proposal to contract out probably
suffers from this.
Finally however, the government now proposes to change the obligation s
around bargaining so we can expect erosion of any headway made here.