How to tell a contractor from an employee

Are you really an employee? If you dressed a hobbit as an elf, called him an elf and sometimes treated him like an elf, and other people did the same, would the law consider him a hobbit or an elf? It's a question our courts are unlikely ever to consider.

But they have considered whether James Bryson, who worked on the Lord of the Rings movies for Three Foot Six (TFS), was an employee or an independent contractor. His contract with TFS said he was an independent contractor, he paid taxes as an independent contractor and most other workers in his industry were contractors.

But Bryson completed six weeks' training for his new job, worked regular hours and was paid for downtime. He worked solely for TFS for more than a year before he became redundant.

The Employment Relations Authority decided Bryson was a contractor. Then the Employment Court said he was an employee and, on appeal, the Court of Appeal said he was a contractor. The Supreme Court has now restored the Employment Court's finding that Bryson was an employee. This means he can now bring a claim of unjustifiable dismissal against TFS.

The Supreme Court found that the Court of Appeal should not have considered TFS' appeal because the question of Bryson's status was a question of fact, not law and because the Employment Court had not misinterpreted the requirements of the Employment Relations Act 2000 (ERA).

The ERA requires the Employment Relations Authority and the Employment Court to consider the "real nature of the relationship" to decide whether someone is an employee or an independent contractor.

They must consider all relevant matters, including those that indicate the intentions of the parties to the relationship.

Based on the Employment Court's decision (restored by the Supreme Court), the parties' intentions about a worker's status are relevant but not decisive and the parties' statements are not decisive. Evidence of industry practice should not be completely disregarded, but is also not decisive.

The question for the Employment Relations Authority and Employment Courts is the "real nature of the relationship". This can be determined by analysing traditional tests known as the "control", "integration" and "fundamental" tests.

The control test considers the extent to which the work is controlled by whoever the work is carried out for. The integration test considers the extent to which the worker is integrated into the business. The fundamental test considers whether a person performing the services is doing so "on their own account" (for example are they running their own business, with their own equipment and the ability to make a profit or loss?).

The Employment Court found it impossible to establish whether Bryson and TFS had any common intention about the nature of their relationship. So it applied the traditional tests and found TFS had significant control over Bryson's work and how and when he did it.

Bryson's work appeared to be an integral part of TFS' business and there was no evidence he was operating a business on his own account (apart from payslips in the form of invoices being prepared, which appeared to be a means to record hours worked).

It was industry practice for most workers to be contractors. But the Employment Court found that most of those workers operated as sole traders or small businesses working on projects for several producers, which did not apply to Bryson.

What this means for you

If your contract says you are a contractor, that is a starting point. But your status might actually be that of an employee if that is the "real nature" of the relationship. This might be the case even if it is normal in your industry for workers to be contractors (or vice versa).

If you work in an industry where people are usually treated as contractors, the decision could mean your status could in fact be employee.

If you are an employee then employment legislation applies to you. This gives you entitlements such as being able to bring claims against your employer if, for example, you are dismissed. You are also entitled to a minimum wage, parental leave and paid holidays and your employer must deduct PAYE from your pay.

If you are an independent contractor these entitlements do not apply but you may benefit in other ways, such as being able to claim business expenses against your income and having more flexibility in your work.

* Rani Amaranathan is an employment lawyer with PhillipsFox.