Outsourcing not so smart for employees

THE DOMINION POST - TUESDAY, 12 MARCH 2013

Employment relationships are always seen as very personal. It is the personality and the qualifications of the individual employed that are critical. The employee has a duty to personally perform the tasks they are assigned.

This is so self-evident that it is very rarely the subject of litigation. But not so in the United States.  A software developer, who is referred to as ‘Bob’, was removed from his position after he outsourced his own role to a Chinese consulting firm.  While Bob was paid nearly US$300,000 (NZ$365,500) a year, the cost of the work done by the Chinese firm only came to around US$50,000

In terms of delivering high-quality work, there was no question that Bob “delivered” this (via China). He had been given outstanding performance reviews for several years in a row and was regarded as the best software developer in the company. In reality, Bob spent his days at work watching cat videos, updating his Facebook profile and shopping on eBay

Everything continued happily until a routine security check by the employer revealed that someone was logged into its system remotely from China. This observation eventually led to Bob’s "House of Cards" collapsing.

An outside firm, Verizon Business, was called in to conduct an investigation and discovered that connections with China occurred regularly. After numerous invoices from the Chinese developer were found on Bob’s workstation, the rest, as they say, is history.

This story is both extraordinary and unusual, and I am not aware of anything similar ever having occurred here. But what would happen if these events took place in New Zealand?

Employees have an obligation of good faith toward their employers. They also have an obligation to behave in a way that promotes trust and confidence. Good faith means not doing anything to mislead or deceive their employer.

Employees also owe a personal duty of service to their employers. They must personally perform the work that is assigned to them.

Clearly Bob was guilty of breaching these obligations and especially of deceiving his employer. The deceit of turning up to work, drawing a wage and pretending that you are in fact delivering the product goes to the heart of trust and confidence. Were he working in New Zealand, he could most certainly be dismissed.

Bob’s misconduct illustrates the difference between a contractor and an employee. If Bob had been engaged as a contractor, then the result would most likely have been different.

A contractor is engaged to produce a result. Normally, it is up to the contractor to decide who does the work and indeed whether or not they wish to sub-contract out some or all of it. The sub-contractor’s relationship can be ended, but in accordance with the provisions of the contract they have.

When there is truly an independent contractor relationship, normally either party could end the contract on, say, one month’s notice and there would be no question of a personal grievance arising. It is simply a commercial agreement for the provision of products or services and is distinct from an employment relationship. The relationship and its termination are governed by the content of the contract.

A company, when it decides whether or not to engage a contractor or employee, will focus on whether it needs the control they get in having an employee - the ability to determine their hours of work, where they work and to closely monitor their performance.

On the other hand, if what the company is interested in is the outcome, then it will engage a contractor and leave it to the provider of services to arrange who does the work and when.

Employment law can sometimes come back to bite companies that contract out services to a contractor. Our law enables the Courts to decide that sometimes, the “contractor” is in reality an employee despite the wording of the contractual documents. Companies therefore need to be clear about this risk.

The Employment Relations Act says that the Courts should look to the "real nature of the relationship" when assessing whether an individual is a contractor or an employee.

In practice, the company’s control over work done, the degree to which the individual is integrated into the company structure and industry practice are factors that are considered. So too is the wording of the contractual document although it is not determinative.

The United States software developer story is interesting on the one hand for the sheer audacity of Bob and the deceit he engaged in. On the other hand, if the focus of the software developer was merely getting high quality work at a good price, it may well have been happy to continue with the relationship but offer Bob and his Chinese cohorts a contractor agreement. And the moral of this story? Perhaps it is that honesty is the best policy.