Communique August 2017

Employees/Contractors/Freelancers

NZACS has long been aware that some small or sole practice firms in our membership contract to other firms from time to time. The recently released NZIA Practice Note PN 1.306 addresses Independent Contractor Agreements.These issues require consideration by both ”principal” and “contractor” firms in terms of PI cover, potential liability, and the terms and conditions of such contracts. NZACS has (perhaps uniquely) arranged for policy terms to accommodate these contractor/freelance issues, and portability of cover for persons moving between firms. Generally employees – or persons engaged on a basis which makes them a de-facto employee – will be covered by the firm’s PI cover. But there are some nuances! In this Communique we have an article on this issue from the architectural perspective by Graham Strez (Claims Director, Principal of Architect Associates), and a commentary from the insurance perspective by Kristene Crook (Professional Risks Division Aon New Zealand).

DEFINITIONS

An employee is hired under a contract of service. The contract will set out the conditions of employment and define the relationship as being employer and employee.Employees are covered by the Employment Relations Act 2000 and have rights to leave as provided by the Holidays Act 2003. The employer takes on responsibility for tax and ACC obligations.Independent Contractors are engaged under a contract for service. They are not covered by the ERA or the Holidays Act 2003 and are generally contracted to work only for a specific period of time. They are responsible for meeting their tax and ACC obligations and may be GST registered.A ‘freelancer’ is a term used to describe a self- employed person working in a contract for service. The freelancer may be working for multiple companies at one time.TO BE, OR NOT TO BE (SELF-EMPLOYED)? THAT IS THE QUESTION.

The freelancer

One member has described his architectural practice as being a jobbing architect for other practices. Most of his fee income was apparently derived from this varied source. He received instructions from and reported to the primary firm, just as an employee architect would do, but unlike a traditional employee, he worked from his own office premises and claimed his own expenses as an offset against income.A feature of this working arrangement was the ability to work concurrently on other projects for other architectural firms, as well as on his own account.His concern was whether he was covered by his instructing firm’s PI insurance policy whilst undertaking their work, and whether he was required to take out his own PI insurance cover for all architectural work he undertook.He suggested that it was not necessary to take out his own PI cover, because that would mean that there were effectively two insurance policies and two premiums in respect of the same potential claim, and if the same insurer responded to the same claim from both firms, the insurer effectively obtained double the premium for their same single risk.This scenario raised some important facts and/or principles for consideration:

1. He operated as a firm; not as an individual.
   • he was an employee of his own firm.
   • his firm pays income tax and GST and his income is essentially derived from wages/drawings.
   • the firm pays ACC levies.
   • he probably pays personal income tax.
   • he offsets his income with revenue expenses for tax calculation purposes, eg rent, services, depreciation, license fees, insurances, etc
   • his work is directed to a significant extent by his instructing firm (principal)
   • he works for a number of principals/clients, often during the same time period.
   • under IRD’s eyes, that would be similar to that of a self-employed sub-contractor.
2. The IRD has clear rules for determining whether a taxpayer is operating as a contractor/subcontractor or as an employee. The courts have endorsed their interpretation.
   • simplistically, if the work one of service, the taxpayer is an employee.
   • if the work is one for service, the taxpayer is deemed to be a self-employed contractor/subcontractor.
   • under subsection 2a), the taxpayer is subject to PAYE and ACC levies, holiday pay, etc.
   • under subsection 2b), the taxpayer is responsible for his/her own IRD tax and GST payments, ACC levies, etc.
   • Tax law and Tort law are unrelated. Why then, discuss IRD policy? Because it clearly defines and distinguishes the distinctly separate roles of employee and self-employed sub-contractor.
3. It is established common law that an employer is vicariously liable for the actions and conduct of their employees whilst undertaking authorised work for the employer. In the scenario raised above, it is necessary to ask if the architect is an employee or “notional” employee, or an independent sub-contractor?
4. It is established common law that a limited liability company is a separate legal entity from its shareholders and/or directors.
5. It is also established common law that an employee is legally liable in tort for the consequences of failing to exercise a duty of reasonable care in their professional capacity. This places self-employed sole-practitioners at heightened litigation risk, because they are always working at the coal-face in relation to their work and advice given. They can’t hide under the corporate veil or umbrella.
6. Insurers would therefore reasonably construe this member’s multi-faceted working arrangement as being one of a self-employed architect or architectural sub-contractor. We are all familiar with this work arrangement under NZIA. SCC.

Employee?

The NZACS-arranged PI insurance policy treats contract staff as a “notional” employee for PI insurance purposes whilst they are working solely for their principal/employer who is insured through NZACS. This notional employee benefit does not apply if they are employed concurrently with other firms or on their own account. (refer policy Definition of Insured and clause 7.09 of the 2016-2017 PI policy) If both the architect contracted to a principal firm and that principal firm are insured through the NZACS scheme, the principal firm’s fee declaration at renewal would not include the fees paid to the contracted architect. In effect, the fee income in respect of the work done by the contracted architect is counted once only (as part of the contracted architect’s assessment) in terms of the PI cover. That is, there is no doubling of premium for the same work provided that both entities are insured through the NZACS scheme. However it is possible that claims are made against both the principal architect and the contracted architect who still benefit from separate defences and indemnity limits under their respective policies, despite the fee income only be declared by one of the parties.The problem for any employee or notional employee is that they have no knowledge or control/influence over their employer’s PI insurance policy and its continuance. They could become personally exposed to litigation risk in circumstances where their prior employer ceases trading or fails to renew their insurance. To guard against this risk, the notional employee might wish to consider taking out their own PI insurance.If an employee of a firm joins an NZACS insured firm, be it in the capacity of a partner, director, principal or employee, that new firm’s PI insurance policy will, at the approval of the firm’s partners or directors, cover the legal liability risk of the past consulting work undertaken by such persons as an employee of their previous firm. Coverage is provided within the terms and conditions of the new firms PI policy and responds in circumstances where they are not able to be indemnified by the former employer, such as where that cover has ceased or lapsed. Any employee changing their employment should discuss this opportunity with their new employer and clarify who will be responsible for payment of the policy excess and unproductive time-loss in the event of a claim against the former employer firm and employee.