Sub-contractors and employment agreements

Santa hires an elf with interesting skills

So, you have recently started a business, and you are considering taking on some employees to help you build your business. It’s an exciting, stressful, and scary step; but it’s often worth it.

This is the first of a three-part blog, which will discuss your basic employment law and accounting obligations. So we, The Comic Accountant, Sam Harith, and  Ashleigh The Advocate aim to provide you with information to prevent common mistakes often experienced by new employers.

Most of the laws referenced in these blog posts will be relevant to the NZ context – but that being said, there are some general tips here you can follow which are quite Universal. 

But before you hire your very first employee (yay!) consider this: 

Have you thought about getting a sub-contractor first?

Sam Harith here. A while back I wrote about hiring your first employee as a business – it’s a scary process because suddenly you are now responsible for the livelihood of other individuals as well. Yikes! 

My general advice is to not hire any new employees until you absolutely need the extra manpower. In the meantime, depending on your industry, you can hire sub-contractors on a by project basis.

Let’s use an example:

Jerry is a builder and sole trader. He has recently scored a $30,000 job to renovate someone’s front porch (it’s a BIG porch) and he realises he can’t do it alone. So he goes out and hires his mates Anand, Tan and Samuel to help him out on a contractual basis.

Jerry’s has to make sure that his mates are remunerated according to the contract signed (and to ensure that health and safety checks are met). He doesn’t have to worry about annual leave, holiday pay and PAYE deductions. His mates get the money from him and they have to sort out their own taxes.

It is also important to note that unless his mates are GST-registered, Jerry CANNOT claim GST on whatever he pays them.

There are some obvious limitations to using sub-contractors (or ‘subbies’ as Kiwis like to call them):

1.       They are independent contractors so you can’t reliably expect them to show up at any time you need them.

2.       The hourly rate for independent contractors tends to be higher than what you would pay an employee in the same position.

3.       Due to points 1 & 2 it is difficult to reliably grow your business while relying on independent contractors

But for the new business owner, getting a sub-contractor is a real easy way to bring in extra hands to tackle those large projects! However, the nature of your business may be that having sub-contractors may not be ideal, in which case you will want to consider drafting an employment agreement for your staff  – these can be either part-time or full time with the terms being either fixed or permanent – Ashleigh will talk more about this in the next section.

But before that…

Ashleigh here; Sam is correct, but do bear in mind that if you choose to engage in an independent contractor, make sure you treat them like one. The law allows an independent contractor to argue that they are, by nature, an employee. There are a number of tests that the law will consider, but the biggest one is: Does the person promote their own business, or your business?

If they are primarily promoting your business, then they are working for your benefit; and this may indicate an employment agreement. Other considerations are:

  • Does the hirer have the right to exercise detailed control over the way the work is performed, so far as there is scope for such control?
  • Is the worker integrated into the hirer’s organisation?
  • Is the worker required to wear a uniform and/or display material that associates them with the hirer’s business?
  • Must the worker supply and maintain any tools or equipment?
  • Is the worker paid according to task completion, rather than receiving wages based on time worked?
  • Does the worker bear any risk of loss, or conversely have the chance of making a profit from the job?
  • Is the worker free to work for others at the same time?
  • Can the worker subcontract the work or delegate performance to others?
  • Is taxation deducted by the hirer from the worker’s pay?
  • Will any business goodwill accrue to the hirer?
  • Is the worker receiving paid holidays or sick leave?
  • Does the agreement describe the worker as an independent contractor

This is a finely balanced test, and recent case law has determined that a courier and taxi driver are, in fact, employees. And speaking of employees…

Let’s talk about Individual Employment Agreements!

The Employment Relations Act 2000 imposes an obligation on you to provide your employees with written employment agreement prior to commencement of employment. But please do not waste your money with this. You can download a free employment agreement template by using the MBIE employment agreement builder here.

Many lawyers will charge approximately $1,500 + GST for a template employment agreement. When I used to draft these agreements, I would take the MBIE template, and edit it using open-source employment agreements I found on Google and with employment agreements already on file.

It’s not difficult, and there is nothing stopping you from doing this; just make sure you do not change the MBIE template too much as other agreements may be out of date. You can look at your previous employment agreements, and those of your close family members. This may prompt you to consider what you want in your employment agreement, and how you want to present it.

Honestly, the biggest risk for new employers is not what their employment agreement does, or does not, contain; it is how they use it. One common example is the clause which usually says: “Either party may terminate this agreement by providing four weeks’ notice.”

No, this does not mean you can terminate an employee’s employment without cause, and without a fair process. It is simply stating the notice period requirements.

There are many other clauses which are commonly misinterpreted; abandonment of employment, medical incapacity, serious misconduct, restraint of trade, guaranteed minimum hours, etc.

When I advocate for an employee, I will usually only raise a claim of breach of employment agreement if the employer has changed the remuneration, hours, or tasks and duties associated with the role. If an employee’s employment has been terminated, I will rely on the principles of fairness, reasonableness and good faith as contained in the Employment Relations Act 2000. Frankly, I do not care what your employment agreement states: in most cases, common law principles will prevail.

Unless you require specific clauses for health and safety, drug testing, or any other industry-specific clauses, my advice is to spend that money learning about your obligations as an employer. Attend a short course on employment law, or engage a lawyer or HR practitioner for a few hours’ worth of coaching. In fact, many employment law practitioners will provide free short seminars on employment law obligations; perhaps a good time to connect with some on LinkedIn, or follow them on Facebook?

Stay tuned for our next part where we look at staying on top of paying your employee’s taxes and what to do about trial periods!

Leave Comment

Your email address will not be published. Required fields are marked *