Failure to document working relationship proves costly in recent ERA decision
The Employment Relations Authority (ERA) recently dealt with a case where a worker claimed employee status while his manager insisted that he was an independent contractor.
The worker argued he had explicitly requested to be "on the books" with PAYE deductions during his initial job interview, which was essential for his mortgage situation.
The dispute emerged when the worker requested a written employment agreement and proper tax treatment several weeks after starting work.
Messages exchanged between the parties revealed significantly different understandings of their working relationship, with the worker maintaining he had never agreed to contractor status.
The case highlights common employment relationship misunderstandings that occur when proper documentation is absent, especially when terms are only discussed verbally. The ERA needed to determine the "real nature of the relationship" by examining how the parties actually behaved.
The ERA applied several established tests to determine whether the worker was an employee or contractor. The "control test" examined how much direction the manager exercised over the worker's activities, including when and where he worked.
Evidence showed the manager allocated work to specific sites, required regular progress reports, and determined payment based on hours worked rather than completed tasks. The worker had no freedom to choose work locations or operate independently.
"[The employer] exercised significant control over [the worker's] work, including setting the time, type and location of tasks he was required to perform. [The worker] was required to take direction from [the employer] and was expected to perform, report and complete the work assigned to him," the decision stated.
The "integration test" looked at whether the worker was part of the business. The ERA found nothing distinguished him from other employees, noting the manager had introduced him as a "Carpentry-Team Leader" to other workers and provided him with necessary tools—typically indicating employment status.
The "fundamental/economic reality test" further supported employment classification. The worker was paid hourly with no opportunity to influence earnings beyond accepting offered work. He took no business risks and had no ability to profit beyond his hourly rate—all characteristics of employment rather than self-employment.
The worker and manager met for a 30-minute "job interview" at a café in July 2023, resulting in an offer as carpentry team leader at $40 per hour with a petrol allowance. However, no written agreement documented their arrangement—creating significant problems later.
No employment paperwork was provided—no written offer, job description, contract, induction material, tax documents, wage records, or holiday records. This lack of documentation became critical when disputes arose about the nature of their relationship.
The manager later admitted during ERA proceedings that he had simply assumed the worker was an independent contractor because he "did not want to take on the burdens of an employment relationship." This contradicted his earlier written testimony claiming he had discussed contractor status during their first meeting.
The ERA found particularly relevant the worker's evidence about specifically requesting PAYE tax treatment. When payment disputes arose, the worker wrote in a message: "I never heard you mention self-employment before, I've always been an employee, just pay me the normal PAYE. On July 27th, when we talked, I asked you to handle the tax, you agreed."
The manager's responses in these exchanges further damaged his position, with one message stating: "We have too many employees now, can't hire staff, only self-employed..." This suggested the manager was deliberately trying to avoid employment obligations rather than reflecting a genuine contractor relationship.
The carpenter had specifically sought stable employment to support his family's financial commitments, including mortgage obligations. He requested payment every two weeks due to financial pressures, writing: "Let's make it every 2 weeks. My previous company did that because I have a lot of home loans, I can't afford to wait that long."
When payment was delayed nearly a month, the worker sent multiple messages describing his worsening financial situation. "You didn't tell me when I was looking for the job that payment would be a month late... Please confirm with me the day you can pay my salary?" he wrote in one message.
The situation deteriorated when the worker informed the manager that if he wasn't paid properly, he would have to stop working. Shortly after, the manager told him there would be no more work available—effectively dismissing him without proper process.
The ERA determined this constituted unjustified dismissal, as the worker hadn't resigned but remained ready to work. The manager's decision to stop providing work, coupled with messages suggesting the worker should "look elsewhere" for employment, clearly indicated dismissal initiated by the employer.
A crucial aspect of the ERA's decision involved determining who actually employed the worker. The manager claimed he was acting on behalf of his company, Construst Limited, but had never disclosed this during their initial meeting.
The ERA applied the "doctrine of the undisclosed principal," finding that the manager was personally liable as the worker's employer because he failed to inform the worker he was acting as the company's agent before employment began.
"An agent's disclosure of agency on behalf of another entity must occur before the contract is entered into. Even though [the employer] may have been acting as [the company's] agent, he did not inform [the worker] of that before he had accepted the offer of work and had actually started work," the ERA explained.
The fact that the worker later had to ask via WeChat, "What's your company's name?" further supported this finding. While the manager replied "Construct Ltd. Why?" he never clarified his role as the company's agent rather than as a direct employer.
This determination meant the manager, not his company, became personally responsible for all employment obligations, including providing documentation, making proper tax deductions, and paying holiday entitlements—significantly increasing his personal liability.
The ERA ordered substantial remedies totaling $27,647.26, including unpaid holiday pay, petrol allowance arrears, interest, lost remuneration, and significant compensation for the impact of the unjustified dismissal.
"[The worker] gave evidence about the stress, humiliation and distress his unjustified dismissal caused him. His family was put under 'great financial pressure' which caused him to be 'extremely anxious', as he was reliant on his wages to be able to pay his mortgage," the decision noted.
The ERA awarded $20,000 to compensate for "humiliation, loss of dignity and injury to feelings," recognizing that the dismissal had severely impacted his wellbeing. "[The worker] described how his ability to eat and sleep was adversely affected and how it had caused him to lose confidence in himself and become depressed," the decision stated.
The ERA also imposed penalties totaling $2,750 for breaching employment standards, with $1,500 to be paid directly to the worker. Additionally, the manager was ordered to inform the Inland Revenue Department that the worker had been his employee and to correctly calculate and remit all required tax deductions.
"[The employer's] actions, and how he acted, was not what a fair and reasonable employer could have done in all the circumstances," the ERA concluded regarding the dismissal, emphasising that employers cannot avoid their legal obligations through improper classification of workers.
