Independent Contractor (Contract for Service) Policy

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Responsibility for Policy:	Director, HRM Division
Approving Authority:	Vice-Chancellor
Last Reviewed:	November 2004
Next Review Date:	November 2007

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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 Employment Authority or Court that in fact the relationship with the University is one of employer/employee, they can then seek the normal protections afforded by employment law. (This may include redress for unjustified dismissal or claims for back payments in 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 employees terms and conditions of employment.

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 Contractor	Employee
Does the independent contractor have control over how, where and when the work is done (within practicality)?	Yes	No
Is the independent contractor responsible for quality and pricing?	Yes	No
Does the independent contractor supervise the job and can the contractor hire other people to do the work?	Yes	No
Does the independent contractor negotiate the price of the job?	Yes	No
Integration Test
	Independent Contractor	Employee
Is the type of work different from that normally done by other individuals who are employees?	Yes	No
Does the independent contractor pay for any expenditure incurred in doing the job?	Yes	No
Does the independent contractor invoice the University?	Yes	No
Independence Test
	Independent Contractor	Employee
Does the independent contractor supply the necessary tools, vehicle, office, phone etc?	Yes	No
Does the independent contractor provide consultancy advice?	Yes	No
Is the independent contractor free to work for other organisations?	Yes	No
Economic Reality Test
	Independent Contractor	Employee
Is the independent contractor responsible for any loss or profit?	Yes	No
Is the independent contractor exposed to normal business risks?	Yes	No
Is the independent contractor liable for correcting sub-standard work?	Yes	No
Intention Test
	Independent Contractor	Employee
Do payments include GST?	Yes	No
Is the independent contract carrying out work done previously by independent contractors? (or has the work normally been done by employees i.e. custom and practice)	Yes	No
Could the University sue the independent contractor for loss?	Yes	No
If the work is not done to specification, can payment be stopped?	Yes	No
Has the independent contractor always worked with the University as an independent contractor? (guide to intention)	Yes	No

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 Payments	Independent Contractor (Sole Trader or Company)	Employee
Tax	If a Sole Trader,  the University must deduct Withholding tax1.  If a Company, no tax deducted by the University.  (The Company pays PAYE or provisional tax.)	University deducts PAYE
GST	Sole Traders must be GST registered and invoices include GST (unless approved by Financial Services Division)  Companies must invoice inclusive of GST	Not applicable
ACC Payments	Independent Contractors responsibility	Universitys responsibility
Insurance	An Independent Contractor should have public liability insurance unless the contract specifies otherwise or the services are provided on University premises.	University primarily responsible
Termination	According to contract High Court overview	Justification required Employment Relations Act
Holiday and Sick Pay	Not applicable (may be paid by the independent contractor to own employees)	University responsibility, subject to Employment Agreement and Holidays Act

Agreeing the Contract

The independent contractor may provide a contract template for discussion and agreement. Alternatively a Independent Contractor Agreement template can be downloaded from the HRM Divisions website as a Word document.

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.

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 Universitys financial commitments and to help forecast cash flow requirements.

Health and Safety

It is important that all job managers are familiar with the Universitys 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 Co-ordinator 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.

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Human Resource Management
Te Wāhanga Whakahaere Pūmanawa Tangata
The University of Waikato - Te Whare Wananga o Waikato
Last modified: Thu Jul 13 09:58:52 2006