A Week in Review

Courier drivers – employee or independent contractor

If you’ve been around as long as I have (I had just ceased working for IR at the time), you may remember the 1993 Court of Appeal decision in TNT Worldwide Express Ltd v Cunningham, which determined the relationship between the company and its drivers, to be that of principal/independent contractor as opposed to employer/employee.

Having just completed an eight year ‘sentence’ with the Revenue at the time, one of the activities I had been undertaking while in the SME investigations team, was completing reviews on various employers to ensure that they were not trying to ‘contract out’ their obligations as an employer (thereby mitigating their exposures to the various payroll related taxes), simply via expressing the nature of their relationship with their workers as being a ‘contract for services’ in the written contract.

The risks for the Revenue in this regard were twofold – regular deductions of PAYE were not being deducted from the workers payments (increasing the risks that income taxes would not be paid – IR’s computer systems certainly lacked the power they have today), and as independent contractors, the employment deduction limitation contained in section DA 2(4) ITA07 no longer applied, so that those workers who did actually declare the income, were declaring less of it, due to the deductions they were now entitled to claim (so less revenue being collected for the Government coffers than arguably should have been in true ‘contract of services’ relationships).

The employer review generally involved completing a multi-page questionnaire, which targeted five specific elements of any working relationship – a series of tests which had been developed by the case law over time (still used in practice today):

1. the intention of the parties test;
2. the control test;
3. the independence test;
4. the fundamental test; and,
5. the integration test.

Having applied these tests in practice for some time, the decision in TNT came as a surprise to many, particularly due to the significance of the level of the control that the company exhibited over its drivers, including:

• the company set the type and colour of the vehicle used and stipulated the advertising it was to carry;
   
• the company controlled the routes and directed the customers to be serviced;
   
• the driver was required to wear a uniform; and,
   
• the driver was not to engage in any other courier contracts.

The Court of Appeal however did not specially address the five classical tests in the case, instead deciding to acknowledge that…

“Courts must recognise the increasing use of contracts for services in many business activities, of which courier and other owner-driver operations are but one example. Where there is a large organisation and a competitive industry, a considerable degree of control may be required to ensure cohesion and efficiency, and a high public profile. This will be for the benefit of the contractors as well as of the owners of the business. The voluntary assumption of such controls in order to gain entry to the industry should not be seen as reason for treating the contract as other than what on an overall consideration it truly is. There are many reasons why both employer and contractor prefer the independent contractor arrangement. They should be free to exercise their choice without paternalistic intervention by the Courts.”

The Court concluded therefore, that the owner-driver accepted only that degree of control and supervision necessary for the efficient and profitable conduct of the business he was running on his own account as an independent contractor, and found that the following factors supported an independent contractor status, in that each courier driver:

• had his or her own territory;
   
• provided the vehicle, the goods and services transport licence required under the Transport Act 1962, an approved radio-telephone and insurance;
   
• was responsible for employing any relief driver;
   
• was employed under financial arrangements that were consistent with an independent contractor and not with salary and wages, with goods and services tax included in the invoices and the payment of accident compensation levies by the owner-driver;
   
• was remunerated mainly per trip; and,
   
• carried the risk of profit or loss in the contractor’s business.

Now you may be wondering by now, what’s my point? Why are we discussing one of New Zealand’s leading case law authorities on employee/independent contractor distinction that is nearly 30 years old?

Well the answer is simply curiosity.

I am just curious, and exploring the possibility of whether an Employment Court decision released last week, may eventually lead to a change in approach by IR, particularly if the decision is appealed by the courier company, but is then reaffirmed at the highest levels.

Why? Because the facts of this case which involves Parcel Express are so similar to TNT, yet the judgement has determined an employment relationship exists between the parties.

Following on in the light of the current ethos that “employment relationships should not be viewed through a conventional contractual lens”, the judge considered the requirement of section 6 of the Employment Relations Act 2000 to determine “the real nature of the relationship” between the hirer and the worker, and that while the courier company promoted aspects of “freedom and flexibility for its driver”, in the judge’s view these benefits were actually not real, particularly when balanced against some very substantial restrictions over the driver which included that he:

• was assigned a run, the boundaries of which were set by the company and in which he had no say (even as to changes in the run); 
   
• performed the job full-time from Monday to Friday and had to be back at the depot at three specified times during the day;
   
• worked where and when he was directed by the company and was required to work in Parcel Express’s best interests at all times; 
   
• had to wear a uniform specified by the company and observe its procedures and the commands of its managers;
   
• had to attend in-house briefings;
   
• had to maintain a telephone link at his home, and provide another vehicle if his own vehicle — required to carry the Parcel Express colours and insignia and to be otherwise free of all other information, even his name — was not in good order and condition; 
   
• had to take out insurance with a company approved by Parcel Express, and for an amount and for such risks as it decided;
   
• could not take more than 20 working days’ holiday in a year without the prior approval of the company and had to organise a relief driver, who had to be approved by the company, during any period of leave; and, 
   
• was subject to a restraint of trade (for six months post termination and within a 100 km radius of Auckland’s CBD) and to confidentiality requirements. 

In the judge’s opinion, few of these elements could be said to be mutually beneficial, and she was not swayed by protestations about industry practice.  

Time will tell naturally whether the case goes to appeal, and equally how IR attempts to use this decision to distinguish between those contractual relationships relying on TNT and other case law authorities to support their principal/independent contractor positions. If we do see such a trend start emerging from IR, how wide-reaching will its effects be, as it certainly would not be limited to the courier driver industry in my view.

Food for thought.

Covid-19: your questions answered

Have you seen this useful link – https://www.ird.govt.nz/roles/tax-agents/covid-19?

It is a regularly updated Questions and Answers for Tax Agents covering a myriad of Covid-19 tax related issues, including any legislative changes further to Government response packages, late filing issues (LTC elections, subvention payments etc.), and IR’s approach to tax residency determinations, where for example, a person may have had their physical presence in a particular taxing jurisdiction extended unintentionally due to border movement restrictions.

As a good example of its usefulness in terms of providing IR views, the first round of legislative response measures saw the reintroduction of depreciation on commercial buildings from the 2021 income year. For those clients operating short-stay accommodation facilities like Airbnb, IR has proactively recognised that this will likely lead to questions by these taxpayers as to whether an Airbnb (due to the nature of the operation) can be classified as a commercial building and consequently depreciated.

IR’s view – not if there are less than four separate units within the same property, due to the recently passed legislative amendment to the definition of a residential building in section YA 1:

Residential building —

(a) means a dwelling; and
 

(b) includes a building intended to ordinarily provide accommodation for periods of less than 28 days at a time, if the building, together with other buildings on the same land, has less than four units for separate accommodation.