Contract for Services Procedure

Purpose

To determine the nature of engagement and subsequent relationship between the University and its contractors in order to ensure appropriate use and engagement of contractor labour and to minimise legislative risk.

Organisational scope

All Contracts for Service engagements.

Definitions

Agreement of Services

Applies to the contract for a person who is an employee of the university. Commonly referred to as an Employment Agreement.

Contract

A document that sets out the nature of the business relationship the University may have with a person or entity for goods and/or services.

Contracting Manager

An employee who has the delegated authority to engage a Contractor on behalf of the University.

Contractor

A person or entity engaged by the University to perform work under a contract for services.

Contractor Agreement

Applies to a person or entity who is an independent contractor. Commonly referred to as Contract for Service.

Employee

A person employed by the University to perform work for hire or reward under a contract of service.

ERA

Employment Review Authority

IRD

Inland Revenue Department

New Zealand Tax Resident

A person in New Zealand for more than 183 days in any 12-month period, or has an "enduring relationship" with New Zealand, or is away from New Zealand in the service of the New Zealand government (refer IR292).

Principal Investigator

Applies to the holder of an independent grant administered by the University and the lead researcher for the grant project.

Schedular payments

These are payments made to contractors and entities such as partnerships who perform activities outlined in Schedule 4 of the Income Tax Act 2007.

Sole Trader

Is a person trading on their own account. The sole trader: controls, manages and owns the business. Is personally entitled to all profits. Is personally liable for all business taxes and debts.

Term

A period of time less than one year.

Content

1. Summary

   1. In principle a Contractor should not be undertaking a core activity of the University (for example: teaching, tutoring, curriculum development, and research work); or performing services exclusively for the University, which also applies to former staff who have resigned applying to contract back to undertake similar work.
   2. The engagement of a Contractor may include the following circumstances:
      1. the provision of specialist professional services for projects
      2. the provision of specific one-off services, and
      3. on occasion the delivery of lectures.
   3. The following entities will not be engaged under a Contract for services (unless approved under exceptional circumstances):
      1. current Employees of the University, as any additional work should be managed using a variation to an employment agreement
      2. former employees (engaged to undertake employment of similar nature of work to their previous employment) of the University.
   4. All Contracts for Services should be reviewed annually.
   5. The Contractor must not start performing services until the Agreement with an Independent Contractor contract has been signed by both parties.

2. Determining the status of the person or entity

   1. In most cases a casual or fixed term employment agreement is the appropriate course. The Employment Relations Act 2000 requires stated grounds for such short or limited arrangements, e.g. a specific project or translation services. The University preference is for employment agreements however the University accepts that for some situations it is appropriate to have a Contract for Services.
   2. To determine the correct arrangement, an assessment needs to be undertaken whether the individual is an employee or contractor. The IRD ERA and the courts have determined various tests to determine the 'real relationship'. Section 3 demonstrates the main principle differences between being an Employee or a Contractor.
   3. Subject to the results of;
      1. an initial discussion with the Divisional HR Manager
      2. Section F - Initial Independent Contractor Determination Check, and
      3. Section G - Detailed Independent Contractor Determination
      4. a formal compliance check undertaken by the Divisional HR Manager.

      If it is determined that a person or entity should be engaged as a Contractor, the person or entity will be offered a Contract for Services in accordance with these guidelines.

   4. If it is determined that the person or entity should be employed as an Employee, a recruitment process will apply.

3. Principle differences between an Independent Contractor and an Employee

   	INDEPENDENT CONTRACTOR (Sole Trader or Company)	EMPLOYEE
   	Contract for Service	Agreement of Service
   Legislation Coverage	Is not subject to the provisions of the Employment Relations Act, breaches of contract are found in common law and statute law. Law suits for damages under 'breach of contract' a loss of some kind must have been incurred as a result of the breach. There is no access to the disputes procedure provided by the ERA – no grounds to raise a grievance.	Employed by an entity under an employment agreement Is subject to common law and provisions of the Employment Relations Act. An employee has right to raise a grievance
   Payment	Contractors provide certain outputs for a defined price usually through a lump sum payment. Schedular payments may be deducted if applicable.	Employees are usually paid for a number of hours which are not related to their output. Payment is by wages/salary.
   Health and Safety	The University and Contractor both have responsibilities.	University primarily responsible.
   Tax	If a Sole Trader, the University may need to make schedular payment deductions. If a Company, no tax deducted by the University. The Company is responsible for their own tax.	University deducts PAYE.
   Supervision	Contractors are responsible for management of work output: provides own tools, transport, skills choose whether to be available has choice of whom they work for as they may have other clients can sub-contract to another person to provide that service if stipulated in the contract.	Employees will work under supervision of another person: employer can control what, how, when and hours of and where the employee will work employee attends a workplace (cannot send someone else in his/her place).
   GST	Sole Traders may or may not be GST registered, this is considered in terms of IRD thresholds. Companies must invoice inclusive of GST.	Not applicable.
   Insurance	Contractor must have both public liability and indemnity insurance.	University's responsibility.
   ACC	PaymentsContractor's responsibility.	University's responsibility. If an employee is injured at work, under the Accident Insurance Act the employer has liability for income.
   Termination	According to contract. Civil Courts overview Cannot be dismissed – law of contract.	Justification required. Employment Relations Authority overview University has the right to suspend or dismiss.
   Holiday Pay	Not paid by the University, may be payable by the contractor, if it has employees.	Payable on taking Annual Leave, or may be paid in employee's hourly rate for casual employees.
   Sick Leave	Not paid by the University, may be payable by the contractor, if it has employees.	University's responsibility.
   Parental Leave	Contractor's responsibility.	University's responsibility.

4. Existing Employees

   1. If an individual is an existing employee of the University, a Contract for Services will not be appropriate, unless approved under exceptional circumstances. There are risks associated with both tax through the IRD and with ERA requirements with regards to the nature of the relationship. There are other implications for the University in regards to existing on-site employment agreements.
   2. If the individual is an employee for another organisation, then it is unlikely they will be a contractor. Unless the individual can provide evidence to satisfy the IRD self-employed contractor definition that in addition to being employed they are also in business on their own account as a contractor.

5. Insurance

   1. The contractor must have insurance to the value of five times the contract fee. This must be maintained for three years following completion of the contract. Questions regarding insurance can be emailed to fsd.insurance@otago.ac.nz

6. Considerations for Entering into a Contract for Services

   1. It is important to clearly define where the funding for the work to be undertaken is coming from i.e. departmental budget or research or other external funding source.
   2. Ensure that the proposed engagement does not give rise to any conflict of interest, and that satisfactory references for the contractor have been obtained.
   3. Check Contracting Manager has delegated financial approval to negotiate a Contract for Service.

7. Non Research Funding Contracts Process

   1. The Contracting Manager (person responsible for the engagement) will download and complete the Application to ENGAGE an Independent Contractor Form available on the Human Resources website.
   2. If the contract spans more than one budget period, this will require the Chief Operating Officer's (COO) approval.
   3. Once the Application to ENGAGE an Independent Contractor Form has been completed and approval has been obtained from the Delegated Approver and the Chief Financial Officer (where required), forward the paperwork to the Divisional HR Manager for compliance checking. Allow five working days for the compliance checking process to be completed.
   4. On receipt of approval to proceed from the Divisional HR Manager, the Contracting Manager will:
      1. download and complete the Agreement with an Independent Contractor Template and arrange with the Contractor for them to sign the Contract and initial each page (bottom right)
      2. ensure there are neither new clauses added nor clauses removed from the template
      3. ensure the signatory in the Department has designated authority to sign.
   5. Forward the Contract to the Divisional HR Manager for signature on behalf of the University.
   6. The original (signed) Contract is returned to the Contracting Manager for payment processing and filing. A copy is retained by the Divisional HR Manager.

8. Research Funded Contracts Process

   1. Due to the nature of the research environment, the Research and Enterprise Office have a separate contracting requirement.
   2. If the funding is for research or commercial work please contact the Research Advisor/Enterprise Manager for your area in the Research and Enterprise Office. If the contract is related to a funding application, the decision on whether the staff required for the research will be an employee or contractor may have an impact on the application.

9. Payment for Services of Contractor

   1. The Contracting Manager will determine the appropriate payments method in discussion with the Divisional HR Manager. Refer to the Payment Flowchart.
   2. A contractor may wish to apply to IRD for a Certificate of Exemption (COE) from tax on schedular payments. If a contractor has this exemption, the payments are processed without deducting tax (schedular deductions). Further information is available on the link below:
      http://www.ird.govt.nz/industry-guidelines/winemakers/employers-wt-exemption.html

      If a contractor has a Certificate of Exemption, payment for services will be processed through Financial Services Division (FSD).

   3. Where the Contractor is subject to schedular payments deductions, the Contracting Manager will forward the following documents to Payroll:
      1. copy of signed Agreement with an Independent Contractor
      2. completed Schedular Payment Account Details form
      3. completed IR330C Tax Rate Notification for Contractors (unless already held by Payroll)
      4. completed Bank Authority form (unless already held by Payroll)
      5. verification of Work Visa (where required)
      6. invoices for payments (note the Contractor's details and tax invoice details must match).
   4. Where the Contractor is not subject to schedular deductions and is a registered company, the Contracting Manager will forward the following documents to Financial Services Division (FSD):
      1. copy of signed Agreement with an Independent Contractor (can be emailed to accounts@otago.ac.nz)
      2. completed New AP Creditor Application (unless already a registered creditor)
      3. Certificate from Exemption from IRD (where applicable)
      4. verification of Work Visa (where required)
      5. invoices to be sent to Account Payable for payment as they arrive (note the Contractor's details and tax invoice details must match).
   5. No advance payment to a Contractor will be made for services to be rendered, before the contract period, except as expressly approved by the Delegated Approver and the Divisional HR Manager.

10. Schedular Payment Deductions

    1. Deductions from schedular payments are an IRD tax requirement and are deducted at source where the recipient is not an employee. Payments are subject to tax at a flat rate even if the contractor is registered for GST. Contracts that require schedular deductions will be processed for payment through Payroll.
    2. An IRD IR330C Tax Rate Notification for Contractors form is required to be completed by the Contractor otherwise an additional rate is applied ('no declaration rate') which is on top of the required schedular deduction. A Contractor may have a Certificate of Exemption which allows them to receive full payment without the deduction of schedular payments. This should be noted in the Agreement with an Independent Contractor document once it is confirmed that the certificate is current.
    3. Different schedular deduction rates apply to different activities and these rates should be checked with the Divisional HR Manager. For Non Resident Contractors different rates apply; again the Contractor could obtain an exemption certificate from the New Zealand IRD. These rates are detailed on the IRD webpage under Schedular Payments.
    4. Refer to the Payment Flowchart on the HR website for further details and to assist with determining whether the schedular payments need to be deducted for the contractor. If the Contractor is based overseas or is not a New Zealand resident, please contact the Divisional HR Manager.

11. Contract Management

    1. Contractors are engaged to meet specific business requirements and must be well managed. The Contracting Manager is responsible for ensuring that:
       1. the Contractor is properly inducted and appropriate access provided (such as with IT), particularly in regard to the University's Health and Safety and ITS policies and procedures; and
       2. all University property in the Contractor's possession is returned before the term of the Contract for Services expires.

Related policies, procedures and forms

• Financial Delegations Policy
• Financial Delegations Procedure
• Schedule of Financial Delegations
• Conflict of Interest Policy

Contact for further information

If you have any queries regarding the content of this policy or need further clarification, contact the Divisional HR Manager for your area.