Cloud over tax status in self-employment arena

By BRIAN FALLOW

WELLINGTON - One of the more controversial changes in the Government's labour law reforms concerns dependent contractors.

Employers have increasingly used contractors as a way to keep down the number of employees on their books and to increase their labour flexibility.

But the Employment Relations Bill includes provisions to extend the rights of an employee to some people currently classified as independent contractors. The bill's authors appear to have in mind labour-only contractors heavily dependent on one firm for work.

But the move has raised concerns about the tax implications for a wider class of people counted as self-employed.

In deciding whether A is an employee of B, the bill says, a primary consideration is the extent to which A is subject to B's control and direction, and integrated into B's business.

National MP John Carter said: "From August 1 petrol tanker drivers, taxi drivers, frozen food delivery people, pizza delivery people, milk tanker drivers and couriers, to name but a few, will find themselves deemed to be employees of the company they contract to. This will effectively destroy a property right and remove any opportunity they have to expense against tax amounts reasonably spent in their business."

But Robin Oliver, Inland Revenue's general manager of tax policy, said that if enactment of the bill changed someone's status from independent contractor to employee for employment law purposes, that would not automatically flow across to his or her tax status.

"In general terms the Employment Relations Bill would include more people [as employees] than would be included under the current law for income tax purposes. Couriers, for example, have been found by the courts to be independent contractors for tax purposes but would probably be employees under the Employment Relations Bill," he said.

"But we will be reporting to the Government about whether they want to align the two ... what the advantages and disadvantages would be."

Labour Minister Margaret Wilson said: "We didn't just give a definition which says all such people will now be deemed to be employees. We have said that if [independent contractor status] is what people want and it is freely negotiated then they are entitled to have it, but it has to comply with the tests.

"We have said in the legislation that the control test and the integrated-into-the-business test are the ones which the court should take special notice of."

The question would arise only if the person concerned made an issue of it.

Ian Gordon, a partner in law firm Morrison Kent, said that given such practical problems as whether PAYE needed to be deducted or whether the Holidays Act applied, contracts would need to be reviewed.

But there should not be any real difficulty in establishing that a situation was sufficiently different from an employment relationship, if that was what the parties wanted.

The bill also allows fixed-term contracts under which employment ceases at a specified date or upon completion of a specified project.

But there have to be "genuine reasons relating to the employer's operational requirements" for such agreements, otherwise it is treated as unjustifiable dismissal. Reinstatement is to be the primary remedy in cases of unjustifiable dismissal.

The aim is to address cases where people are in effect permanent employees, whose "fixed-term contracts" get rolled over on expiry.

But Russell McVeagh partner Richard McIlraith said that an unintended consequence of such a measure could be to make it much more expensive to negotiate the early departure of people in senior positions such as chief executives if their boards want to get rid of them.

"At the moment you can rely on the fact their contract only has a finite period left to run and there is no presumption they would be re-employed. Under the proposed change they might be able to argue that there is no operational reason for the chief executive to be on a fixed term, so the dismissal is unjustifiable and they are entitled to reinstatement. Their negotiating leverage is increased. Exit packages for senior employees have just gone through the roof."