Independent Contractor (Contract for Service) Policy
Responsibility: HRM Division Creation Date: September 2001 Current Version: Draft for Consultation Next Review Date: September 2004 ________________________________________________________________ Policy Statement An employment agreement (contract of service) is to be used in preference to an independent contract (contract for service) arrangement. Individuals must not be engaged to work through an independent contractor status unless the tests, as determined by the courts and outlined below, are fully satisfied. Independent contractor arrangements are most appropriate for a short-term period to undertake specific (and specialised) consultancy work. The responsibility for entering into and managing independent contracts rests with the relevant manager (the job manager) and their Dean/Director or equivalent senior manager. The HRM Division provides these guidelines and a contract template which can be downloaded and adapted to suit the circumstances. More specific advice and assistance can be sought from the Financial Services Division. Scope This policy applies to all independent contractor engagements. Purpose To ensure that only bona fide independent contractors are engaged on a contract for service. To reduce the risks associated with defining an individual as an independent contractor when they should be regarded as an employee. Risks If there is any doubt whether or not an independent relationship truly exists, both the Inland Revenue Department (IRD) and the employment courts prefer to define a relationship as employer/employee. Under the Employment Relations Act the Employment Authority or Court is required to consider the “real” relationship between the parties taking into account all relevant factors. A written agreement that declares a contract for service relationship may be regarded as merely a label if the circumstances and facts are indicative of a different relationship. If the IRD is able to establish that the „Independent Contractor‟ is in fact an „employee‟, the University may risk prosecution for failing to deduct PAYE tax. If an „Independent Contractor‟ is able to establish through application to the Authority or Court that in fact the relationship with the University employer/employee, they can then seek the normal protections afforded by law. (This may include redress for unjustified dismissal or claims for back relation to an applicable collective agreement.) References The University of Waikato Policy for Contractor Health and Safety The Employment Relations Act 2000 Inland Revenue Department Definitions Employment Agreement is a contract of service between an employer and employee and includes an employee‟s terms and conditions of employment. Employment is one of employment payments in
Employee means any person of any age employed by an employer to do any work for hire or reward under a contract of service. Independent Contractor is an individual or organisation that supplies labour services through a contract for services. The individuals involved are not employees of the University, but are employees of another organisation, or are self-employed. Independent Contract is a written document that sets out the contractual arrangements that detail the outcomes to be delivered by the independent contractor. Procedure The Tests for Independent Contractor Status The hiring of an independent contractor under a contract for service is guided by the following tests that have been determined through the employment court. If a complaint is made or a dispute arises, then a number of tests will be applied by the authority or the court to determine the true nature of the relationship and the corresponding rights and obligations under employment and taxation law. An independent contract may be used where the following tests are satisfied. If the answer to the following questions is generally “yes” an independent contract may be used. In all other circumstances an employment agreement must be used. Control Test Independent Employee Contractor Yes No No No No
Does the independent contractor have control over how, where and when the work is done (within practicality)? Is the independent contractor responsible for quality and Yes pricing? Does the independent contractor supervise the job and can Yes the contractor hire other people to do the work? Does the independent contractor negotiate the price of the Yes job? Integration Test
Independent Employee Contractor Is the type of work different from that normally done by other Yes No individuals who are employees? Does the independent contractor pay for any expenditure Yes No incurred in doing the job? Does the independent contractor invoice the University? Yes No Independence Test Independent Employee Contractor Does the independent contractor supply the necessary tools, Yes No vehicle, office, phone etc? Does the independent contractor provide consultancy Yes No advice? Is the independent contractor free to work for other Yes No organisations? Economic Reality Test Independent Employee Contractor Is the independent contractor responsible for any loss or Yes No profit?
Is the independent contractor exposed to normal business Yes risks? Is the independent contractor liable for correcting sub- Yes standard work? Intention Test
No No
Independent Employee Contractor Do payments include GST? Yes No Is the independent contract carrying out work done previously Yes No by independent contractors? (or has the work normally been done by employees i.e. custom and practice) Could the University sue the independent contractor for loss? Yes No If the work is not done to specification, can payment be Yes No stopped? Has the independent contractor always worked with the Yes No University as an independent contractor? (guide to intention) While the above tests are not definitive, most of the tests will need to be satisfied or the Courts could prefer to interpret the relationship as employer/employee. A common sense approach should be adopted; if in any doubt about the correct relationship, managers should err on the side of caution and proceed with an employment relationship. Taxation and Other Payments
Taxation and Other Independent Contractor Employee Payments (Sole Trader or Company) If a Sole Trader, the University University deducts PAYE Tax must deduct Withholding tax1. If a Company, no tax deducted by the University. (The Company pays PAYE or provisional tax.) GST Sole Traders must be GST Not applicable registered and invoices include GST (unless approved by Financial Services Division) Companies must invoice inclusive of GST Independent Contractor‟s responsibility University‟s responsibility
ACC Payments
Insurance
An Independent Contractor University should have public liability responsible insurance unless the contract specifies otherwise or the services are provided on University premises.
primarily
Termination
According to contract – High Justification required Court overview Employment Relations Act Not applicable (may be paid by University responsibility, the independent contractor to subject to Employment own employees) Agreement and Holidays Act
Holiday and Sick Pay
Agreeing the Contract The independent contractor may provide a contract template for discussion and agreement. Alternatively a „Contract for Services Agreement‟ template can be downloaded from the HRM Division‟s website at: The services to be performed should be clearly specified. Note any specific performance standards, critical progress dates, and final dates for completion of the tasks. If specific material is to be provided by the contractor then this should form part of the agreement. All known costs and expenses which will be incurred by the contractor in providing the services should be included in the overall fee. A total fee, inclusive of any GST, should be agreed in the contract. Make note of the invoicing arrangement or of any specific payment dates. Invoicing, payment and taxation requirements will vary depending on whether the independent contractor operates as a sole trader or as a company, and also on the nature of the services to be performed. The Financial Services Division can provide advice in this area.
1
Withholding tax must be deducted from payments made to independent contractors (individuals and partnerships, but not incorporated companies) at the appropriate rate, unless the independent contractor provides an IR13 exemption certificate (this applies to residents only). For overseas residents, withholding tax of 20% is deducted but no IRD number is required. Non residents who are providing services of a cultural nature for a government or an overseas non-profit making organisation, or non residents who are official representatives of any sport/game, are exempt from withholding tax.
The signed contract should be held by the job manager, with a copy forwarded to the independent contractor. A further copy should be sent to the Financial Services division for use in monitoring the University‟s financial commitments and to help forecast cash flow requirements. Health and Safety It is important that all job managers are familiar with the University‟s Policy for Contractor Health and Safety. The job manager is responsible for ensuring that independent contractors and sub-contractors work in a safe and healthy manner and are not harmed (or do not cause harm to others) while working on University premises. A health and safety induction process and appropriate monitoring of health and safety performance during the contract must be carried out. For further information, contact the Health and Safety Coordinator in the Human Resource Management Division. Managing the Contract Dealings with the independent contractor must remain consistent with their status. The level and type of control that is exercised must focus on the tasks and standards detailed in the contract, rather than on the way in which these are performed. Measures of Effectiveness Increased knowledge among University managers about the criteria to be met when considering a contract for service. Improved documentation when establishing a contract for service, including consideration of health and safety requirements. Reduction in the number of cases referred to Financial Services Division for a decision.