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Will employees and contractors survive in the gig economy?

29 March 2018 - By Christie Hall and William Fussey

The employee/contractor distinction is nearly as old as work itself in New Zealand. Even the concepts of a “contract of service” and a “contract for services” have the quaint ring of another era.

More recently, the increase in “on-demand” app-based service providers such as Deliveroo, Uber, TaskRabbit, and Lyft are changing the way in which we work. Agile business models call for a business to be able to draw in resource on an “as and when required” basis, flexing resource needs to manage client demand and current innovations. Added to this, many individuals are no longer satisfied with working full-time for one employer – an accountant may moonlight as a blogger, a teacher may sell organic cakes at a weekend market, and a dad may take a series of short-term engagements to spend more time with the kids. In addition, the high fixed cost of labour is forcing organisations to break down roles into tasks (in the same way that disruption of the music industry broke down albums into songs), giving each task to the most efficient resource.

But where does this leave contracts “of service” and “for services”?

The gig economy business model makes financial sense. It enables business to connect end users with service providers on a timely basis, provides workers with greater flexibility and avoids the costs associated with an employment model. However, the model does not work well for vulnerable workers forced to accept work whenever and wherever it is offered, and to try and make ends meet when it is not. The gig economy places degrees of separation within the traditional employer/employee relationship and, with that, reduces responsibility.

New Zealand’s current model is binary, forcing businesses to choose between an employment model, with the minimum entitlements and termination restrictions that brings, or an independent contractor model with fetters on the degree to which the worker can be controlled or integrated. While there are possible variations, such as casual employment or engaging workers through a labour hire company, these options do not provide a neat solution.

We are not alone in seeking to address this problem. Other countries are grappling with similar issues. At the forefront are some of our most successful gig model businesses.

Gig workers as independent contractors – the Australian perspective

In December 2017, the Fair Work Commission in Victoria found that Uber drivers were independent contractors, rather than employees. Like New Zealand, Australia operates a binary structure, where individuals are classified as employees or contractors.

The Commission considered a range of factors, similar to those that our courts would look at. Decisive factors in the Commission’s decision were that in Australia drivers were not required to accept a certain percentage of rides offered, and were not permitted to use branded vehicles or clothing. In addition, the individual involved in that case used the ride app intermittently and irregularly, working the use of the app around his other commitments.

Is there a middle ground?

The United Kingdom has taken a different approach. The workforce is split into three broad categories: employee, worker and independent contractor. The “worker” category provides a reduced set of minimum protections, including the minimum wage, paid holidays, statutory sick leave, rest breaks and protection from unlawful discrimination. However, workers do not receive unfair dismissal rights or statutory redundancy pay.

The distinction between a worker and an independent contractor has caused issues, with many gig businesses arguing that their people are true independent contractors in business on their own account. This has been called into question by the courts in a series of cases.

In late 2017, the UK Employment Appeal Tribunal (EAT) found that Uber drivers were workers rather than independent contractors. The EAT rejected an argument that Uber acted as an agent for the drivers. It instead considered that sufficient control was exercised over the way in which the drivers worked to classify them as workers.

Although there were factors that pointed towards drivers being independent contractors, such as being permitted to work for direct competitors, paying tax on a self-employed basis, and providing their own vehicle, the EAT found that the drivers were not operating businesses on their own account. Drivers were expected to behave in accordance with the company’s requirements – those with a rating below 4.4 received quality interventions to help them improve and could have their accounts deactivated if improvements were not made. Drivers were obliged to accept at least 80% of trip requests to retain their account status and had to follow the prescribed route when transporting passengers. This case is likely to be subject to further appeal.

The UK Supreme Court is currently deliberating the issue for the first time in a case involving Pimlico Plumbers, a large-scale plumbing service. When the Court of Appeal heard that case, the fact that the plumbers used branded vans and had a contractual obligation to work minimum weekly hours weighed in favour of the plumbers being workers rather than independent contractors. The Pimlico Plumbers decision is being watched with interest by many others in the UK construction sector, which uses a similar model.

In a recent case with the opposite result, the UK Central Arbitration Committee (which resolves collective employment disputes) found that Deliveroo drivers were independent contractors, rather than workers. Deliveroo drivers are managed by an algorithm that communicates with them via their smartphone, with drivers being given deliveries based on their radius from the job, in order to maximise efficiency for the company. A decisive factor in the decision was the ability of Deliveroo drivers to substitute their labour with another worker, both before and after accepting jobs. Another claim against Deliveroo is due to be heard in the Employment Tribunal in July 2018, so it will be interesting to see whether a similar result emerges.

Interestingly, the UK cases have primarily been supported by the Independent Workers’ Union of Great Britain. One of the commitments of the New Zealand Labour party going into the last election was to extend the right to organise and bargain collectively to contractors who primarily sell their labour.

What is the position in New Zealand?

In New Zealand, our courts currently remain faced with a binary employee/contractor model. The Minimum Wage (Contractor Remuneration) Amendment Bill, a member's bill proposing to introduce a contractor minimum wage, was narrowly voted down just prior to last year’s election.

The new Labour-led Government has expressed a commitment to introduce “statutory support and legal rights” for dependent contractors in its first year in office. The detail of what this might entail is unclear, but any differentiation between dependent and independent contractors is likely to have the effect of creating a middle ground between employers and contractors, similar to the UK position.

In the interim, our courts have indicated a willingness to apply the traditional tests in new ways in order to protect vulnerable workers. For example, in the recent case of Prasad v LSG Sky Chefs New Zealand Ltd [2017] NZEmpC 150, the Employment Court found that independent contractors of labour hire company Solutions Personnel Ltd were, in fact, employees of the end-user client, LSG Sky Chefs.

Although the individuals had signed documents confirming an independent contractor relationship, in applying the tests set out in the Bryson v Three Foot Six Ltd [2005] NZSC 34 case, the court found the individuals to be employees. The court was influenced by the fact that the individuals were highly integrated into the business. They received ongoing supervision from LSG, had the same rosters, uniform and meetings as LSG employees, and performance issues and requests for increased hours were dealt with by the LSG line manager directly. Indicators of an independent contractor status, such as the individuals advertising their services, being registered for GST, employing others and running a business on their own account, were notably absent. The court left open the possibility that even if the plaintiffs had been hired as employees of the labour hire company, there may have been a dual or joint employer relationship.

The court acknowledged that the “traditional binary notion of employment, and unitary concept of employer, is increasingly being challenged by innovative ways of working and structuring relationships”. In this context a labour-hire agreement is not an “impenetrable shield” and every situation must be assessed on its facts.

Irrespective of the model adopted in New Zealand there will be businesses who try to operate at its boundaries. In an increasingly competitive market, small margin gains can spell the difference between success and failure, and fixed labour costs remain a large item on the books of many companies. The UK experience has indicated that the creation of a middle ground for dependent contractors will not be a silver bullet, and we can expect further litigation in this space, particularly off the back of legislative change.

The gig economy is, however, creating new ways in which human labour can be deployed, and with it new challenges in balancing productivity and innovation against worker rights. We can expect some movement in the short-term from our new Government as it tries to achieve a balance between supporting business to innovate and workers to be flexible, while still ensuring that the most vulnerable in our working population receive adequate protection. It is not an easy task.

Christie Hall is a director and the New Zealand Law Leader of EY Law Ltd. She is also a member of the Law Society Employment Law Committee. William Fussey is a solicitor in the EY Law Employment and Health & Safety practice.

Last updated on the 29th March 2018