Consultation : Contractor or employee?

I have recently moved to new organisation in the role of general manager and have question about our accountant. She has apparently been employed by us for 13 years, working three days week as part-time contractor. I instinctively felt uncomfortable about this and wasn’t sure why. On checking with friend who is chief executive of another organisation he advised me to make her an employee as he thinks there might be tax risk. I don’t see why this would be the case as she is self employed and pays her own tax. Do you have any thoughts on this?

Your instinct was correct as it is possible this person is actually an ‘employee’ and therefore eligible to receive legal entitlements such as four weeks’ paid annual leave, and sick leave. Also if they are an employee then your organisation will be liable for paying their income tax.
There are some questions you can ask to see if person is an employee. First ask, was it the intention of your company and the accountant to form an employment relationship and has this been documented in written agreement? I suspect at the outset of the relationship the answer would have been “no”, but after 13 years it may have defaulted to an employment relationship without it being realised.
Second, ask who controls the hours worked by the accountant? In your case it appears to be you, the employer. Ask do you have the power to hire or fire the accountant? Again in your case the answer appears to be “yes”. Then ask do you supply materials for the accountant’s work? That is desk, chair, an office, computer, systems etc. Again the answer is “yes” in your case. Finally ask whether the accountant works solely for your organisation or contracts out services to other organisations on their off days?
As you can see, “yes” answers to the majority of questions above give the impression that the accountant is more of an ‘employee’ than ‘contractor’. So there could be exposure for you in that an employee is entitled to significantly more rights and obligations from the employer than contractor would be.
Also there could be tax exposure as if the accountant is an employee then you are liable for deducting their tax from their gross pay. Therefore you do need to seek expert advice on this situation and also need to make sure you consult with and involve the person concerned.

Our business has recently had very rough ride and we came very close to declaring bankruptcy. We implemented major and severe cost cutting campaign which resulted in number of redundancies and caps on spending. Initially this has had huge and positive impact but now we are suffering because we haven’t been investing and are short of people. I can see we are on the edge of sliding back to where we were before if something isn’t done soon. Can you help please?

It sounds as if you have done great job in turning your business around and gaining control of your costs. The first step in any critical business situation is definitely to focus on understanding where you are haemorrhaging and then applying tourniquet. The only problem is that doing this actually cuts off the blood supply and if the tourniquet isn’t released appropriately then further problems arise.
As you have discovered, one of the major downsides from cutting costs is that you can end up not having enough people available to take the organisation forward once it has recovered. So now that you have stopped the bleeding you need to focus on releasing the energy in your remaining people.
Make sure you know the strengths and weaknesses of all your current staff and then aim to get the right people in the right places. Once you have done this concentrate on communicating clear and straightforward picture of where the organisation needs to go and give people the responsibility for getting it there. This will result in increased engagement and an environment of ownership. The outcome is likely to be significant growth in innovation and new ideas. It takes some courage to do this but if you do you will end up with significantly more coming from the reduced number of people.
Then you will be free to focus on the key issue of introducing and embedding the right systems and processes to sustain the organisation and create roadmap for the new ways of doing things that will come from this enhanced energy.

Kevin Gaunt, FNZIM, FAIM, is CEO of NZIM Auckland and has been senior executive with, and consultant to, some of New Zealand’s largest companies.

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