A director is a person elected or appointed to manage a company's business and affairs. Notably, directors can be both an employee or a contractor. The differences between these roles affect the rights and responsibilities of the director and their organisation. When a director is an employee, the company is legally obliged to provide minimum entitlements. Failure to do so could result in significant liability for the company. This article explores the legal differences between a company director who is an employee versus a contractor in New Zealand.
What is a Director?
A director is someone who is responsible for leading and overseeing a company's business and affairs. As a director, you have a set of legal and ethical duties and a range of important tasks you are expected to complete.
The legal duties of a director are to:
- act in good faith;
- maintain a duty of care;
- use your powers for the good of the company;
- follow the Companies Act and your company constitution;
- be able to meet your commitments;
- trade sensibly to protect your creditors; and
- use company information appropriately.
Additionally, a director's tasks can include the following:
- setting up and monitoring the company's strategy, risk management, and employee well-being;
- setting up policies and making decisions;
- filing legal documents;
- calling meetings;
- keeping records;
- setting up contracts with suppliers, lenders and others; and
- following all the laws relevant to your company.
Every registered company must have at least one director. You need to inform the Companies Office who your directors are and provide accurate details about them. The director must agree in writing to be a director and have their name (and other details) recorded on the Companies Register.
Types of Directors
Sometimes, the type of director will reflect whether that director is an employee or a contractor. For example, executive directors usually have a dual role as company employees and directors. As directors they:
- have responsibilities but must retain a degree of independence from their executive role; and
- must always be alert to potential conflicts between their management interests and their duties as a director.
If you are an executive director, you will likely receive a salary from the company in your capacity as an employee. It is important that your employment agreement captures the terms of this arrangement. Your remuneration as an employee is subject to tax under the PAYE rules in New Zealand.
Like other employees, the company may pay your KiwiSaver contributions (if you have enrolled in KiwiSaver).
Typically, executive directors will not receive a director fee in addition to their salary.
When determining whether a director is an employee or contractor, it is important to note that while the parties' intention is relevant, the courts will consider beyond the terms of any agreements. They will evaluate the true nature of the relationship when determining if a director is an employee or contractor.
Determining whether someone is an employee or a contractor requires you to determine the real nature of the relationship. This involves a series of tests and requires analysing the parties' intentions and how the relationship operates in practice. This is specific to each individual arrangement/relationship. These tests are:
- intention test;
- control vs independence test;
- integration test; and
- fundamental/economic reality test.
You need to think about your situation and apply all the tests to help you to decide. No one test will give you the correct answer.
The intention test considers the intentions of the parties. This may involve a review of the contracts in place and assessing whether an employment agreement or contractor agreement has been signed. As noted, while this is relevant, the courts will look further than intention when determining if a director is an employee or contractor.
Control vs Independence Test
This test evaluates the independence of the director. The greater the control exercised by the organisation over the director's work content, hours and methods, the more likely that the director is an employee. A director with greater freedom to choose who to work for, where to work and when is more likely to be a contractor.
This test looks at whether the work performed by the person is fundamental to the business. Typically, this is the case for the work performed by a director.
Usually, the work performed by a contractor is only a supplementary part of the business. A person is more likely to be considered to be an employee of the organisation if the work they complete is:
- the type that employees commonly complete;
- continuous; and
- for the benefit of the business rather than for the benefit of the worker.
Fundamental/Economic Reality Test
The economic reality test involves looking at the total situation of the working relationship to determine its economic reality.
It is important to obtain legal advice to determine if a director is an employee or a contractor. A failure to correctly identify the relationship may put the organisation at risk of sham contracting. This is where an employer deliberately attempts to disguise an employment relationship as an independent contracting arrangement. Likewise, an incorrect classification may expose the organisation to a range of liabilities.