Is a fair process required to terminate a contract for services?

It is well known that a fair process must be followed before terminating an employee’s employment.  But what is the situation where the person is a contractor, engaged under a contract for services, rather than an employee?  Is that person due an opportunity to explain or improve their conduct before facing the axe?

In Ike v NZ Couriers Ltd [2012] NZHC 558, the High Court (Toogood J) considered a case where a courier driver engaged under a contract for services had his contract terminated without notice on the basis that he had breached the ‘diligence, dress and courtesy’ provisions of the contract.

The courier driver’s case was based on an argument that the company’s contractual ability to terminate his contract was limited by a subsequent provision allowing for a reasonable time to remedy any breach. The driver’s argument was essentially that because of this ‘reasonable time to remedy’ provision, the company was contractually bound to follow a fair process in terminating the contract. The driver also said that because of the similarity between the courier contract and an employment agreement, the Court should imply obligations of fairness on the company.

The Court noted the well-settled law that courier drivers engaged on a contract for services are not to be treated as if they are employees, and held that obligations of fair and reasonable treatment are not to be implied into a contract for services unless the express terms of the contract provide for this.

The Court held that in this case, the relevant provisions did not justify the implication of an over-arching obligation of fair treatment; finding that the power to terminate the driver’s contract was not governed by any obligation to allow him time to remedy any breach. Rather, the provisions of the contract simply meant that the Court had to be vigilant to ensure that the powers provided by those provisions were properly exercised. The driver’s case was dismissed.

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10 Comments

  1. Lewis Thompson 6 August 2012 at 10:50 pm

    I have had a similar question come at me. A small school who has two teacher aids as contractors have decided to end these contracts as the cost of having contractors has shown to be well above having these positions filled with employees. I have discovered they did not have a written contract but still advised them to give the contactors two weeks notice. To keep everything above board they are going to advertise these two positions with clear criteria and terms of conditions which will allow both contractors to apply.

    A more transparent process compared to the first request to just offer the contractors a take it or leave it position of full time employment at a lower rate.

    Reply

  2. Thanks for your comment. Note also that in a situation where you have ‘contractor’ roles that (a) have no written contract, and (b) are going to be re-advertised as employment roles, an initial key question to consider is whether the Teacher Aids concerned are in fact already employees (there are a number of cases on the definition of ’employee’ under s6 of the Employment Relations Act 2000).

    Reply

  3. Hi Karen, great commentary. There are earlier cases reaching the same conclusion as Ike. I guess it is a reminder that the law hasn’t changed. Ike did not challenge the contractor status. At the present time there seems to be an acceptance that TNT v Cunningham stands regarding couriers. However, it has never been seriously challenged under section 6. No full court and no Court of Appeal. There have been some developments in Aus based only on common law principles, i.e no s 6 test. The two, now historical, Vabu cases were both couriers, apparently on the same contract with different outcomes. More recently Ace Insurance brokers have been held to be employees and there is similar litigation pending in NZ.
    The more vexing issue is how do you advise clients when the contractor/employee status is questionable? Is it prudent to run a process similar to employment so that if the person is held to be an employee justification is covered?

    Reply

    1. Thanks Jim. Yes, it does tend to be advisable to run a similar process to employment when ending a doubtful contract relationship. But it can be a fine line to walk – i.e. to avoid a process that provides a further indication of an employment relationship by its own steps!

      Reply

  4. A timely reminder Karen, thanks and the comment about the risk of NFPs using contracts to avoid the apparent risks of employment agreements is helpful and should be given wider publicity.
    Despite the well-settled case law that Karen refers to, local committees and NFP boards still believe that they can happily agree on contract terms that would never survive even a mild challenge from a disgruntled ex “contractor”.
    Still situations like that do keep a number of us entertained from time to time!

    Reply

    1. Thanks Cliff. There seems to be very little guidance online about this either. The IRD used to have a checklist for determining contractor /employee status, but I didn’t manage to find it when I looked earlier this week.

      Reply

        1. Thanks! Looks helpful. Do you know whether they’ve updated the one-page checklist?

          Reply

          1. Rosemary Hancock 9 August 2012 at 9:16 am

            Don’t know, sorry.

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