Contracting to meet the Health and Safety in Employment Act 1992 -- draft guidance for principals

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2. Who is a principal?

You are a "principal" in terms of the Health and Safety in Employment Act 1992 if you are an individual or a body corporate who engages any person (other than an employee) to do any work for gain or reward. This usually requires a contractual relationship in which the principal pays for the work of the person engaged. The duty under section 18 is then placed on the person able to ensure relevant obligations are performed through that contractual relationship.

The major exception to the definition of a "principal" is when a householder engages someone to do work on his or her home. As an example, if you hire a plumber to fix a blocked drain in your home, you are not liable under the Act for the safety and health of the plumber while the work is carried out.

If, on the other hand, you contract with a builder to do a major alteration to your home and they subcontract a plumber, the builder is considered a "principal" in terms of section 18. A contractor is considered a "principal" with respect to subcontractors. This is an important point for businesses to consider. The diagram below illustrates a multi-party contractual situation for a small project. It shows that, although the client has responsibility as a principal, several parties can be principals at any one time and all key people have a duty to provide for the health and safety needs of their own areas of operation.

Typical contractor/principal relationships for a construction project

The contractual scope of section 18

Section 18 applies where there is a contractual relationship between principals and self-employed people or business units such as companies and partnerships; generally called "independent contractors". The duties owed under section 18 extend to the employees of any such self-employed person, or business unit. As we have seen, the principal might have employees of its own, who will be owed separate duties arising from the employer/ employee relationship.

Where a company or other similar business unit is engaged to do work, there is a clear distinction between engaging such a business and hiring an employee. However, where an individual person is engaged, the distinction may be less clear. Questions might arise on whether the duty is owed as a principal under section 18, or as an employer under different provisions in the Act. Where there is a contract between a principal and a self-employed person, the duties of a principal under section 18 apply. Where there is an employer/employee relationship in existence, then the duties of an employer/employee relationship apply (refer to part 2 of the Guide to the Health and Safety in Employment Act 1992).

Deciding whether someone is an employee or a self-employed contractor

It may not always be clear whether a person is an employee or a self-employed contractor. Nor is it always of particular significance to the parties concerned, as long as their respective needs are being met. However, in the event of a dispute, or a prosecution after an accident, a court may have to determine the nature of the relationship. In making its determination, the court will place little importance on how the parties have described the arrangement. It will look at a number of other factors, including:

Indications of being an employee

The key question courts ask is whether the person performing the work is in business on their own account. This involves a variety of legal tests and the courts look to the reality of the working relationship, as opposed to the contractual "label" parties have attached to it.

A work relationship is likely to be an employment relationship between employer and employee if the:

intention of the employer and the person performing the work is to form an employer/employee relationship, as shown in any written agreement or correspondence and/or by the behaviour of the parties to it
employer or their agent controls the hours worked (how and when the job is done)
payment is made by the hour, week, etc, as opposed to a lump sum
employer or their agent has the power to hire and fire
employer makes the profit or loss from the enterprise
employer deducts ACC premiums and PAYE tax on behalf of the employee
employer supplies materials for the work
person performing the work cannot make a profit or loss from the way in which the work is carried out (for example, they are not paid on a "per job" basis, regardless of how long the work takes)
employer owns or leases the equipment needed
person performing the work is bound to one employer at a time and is expected not to compete with or offer his or her skills to competitors of the employer.

Indications of being a self-employed contractor

It is more likely to be a contract where the person performing the work is classified as an independent contractor (with the duties of a self-employed person) if all or most of the following features are present in a work relationship, that is the:

intention of the parties to the contract is not to form an employer/employee relationship, and this is reflected in the contract and/or the behaviour of the parties
payment is made in a lump sum at the end of the job, or in instalments as the job progresses

and the contractor:

controls how and when the job is done
can choose who does the job and hire other people without specific approval from the other party
pays any tax, ACC or insurance themselves
can make a profit, or suffer a loss directly
supplies equipment and materials
is free to accept similar work and materials from a number of sources at the same time.

"For gain or reward"

The contractor must be engaged "for gain or reward" in order for section 18 to apply. Case law has found the "gain or reward" must move directly from the principal to the person or company engaged through the contract.

The contract need not be written, and all terms do not need to be explicit, but there must be contract formation in the normal legal sense of an offer, an acceptance of the offer, and a mutual transfer of value (the "gain or reward").

"Gain or reward" need not be financial. It could be payment in kind, an exchange of labour or services, or (as mentioned above) the benefit gained from a service or warranty agreement. The association between the principal and the contractor must be clear and direct.

Agents and advisers

Often a principal will act through an agent or adviser. This includes situations where a company uses expertise that it does not retain in-house to purchase specialist goods or services.

The use of an agent or a management facility by a principal does not mean the principal avoids their duty under section 18. For example, where a body corporate, as a building owner, asks a letting agency to organise a contractor to repair a roof, and the account is forwarded by the agent to the building owner, the owner still has the duties of a principal.

Example

Three development companies hired Loosefit Ltd to act as their agent in co-ordinating contracts for work on a warehouse conversion site. Loosefit accepted a tender for window installation from Glassy Ltd but made it clear that invoices were to be directed to the developers and not to Loosefit. A subcontractor was seriously injured on the site when he fell through a skylight. Loosefit was held not to be a principal because there was no contractual connection between Loosefit and Glassy Ltd or between Loosefit and the injured subcontractor.

Alternatively, if the agency commissions the work and pays the bill, it is a principal in relation to the contractor. An individual acting as an authorised agent of a body corporate may also commit an offence under section 56 if they "direct, authorise, assent or acquiesce in" a breach of the Act by the body corporate for whom they are acting.

None of these situations, however, negates other duties that might be owed under other provisions in the Act, such as those by a person in control of a place of work. In the case above, for example, the agent for the development companies had day-to-day control of the work site through one of its employees.

There are situations where a designer/adviser may effectively be engaged as a contractor to manage a project or as an agent and will enter into contractual arrangements of its own. In such a case, where the designer is responsible for engaging a contractor, they have the responsibilities of a principal also. To avoid unnecessary repetition, subsequent references to a "principal" includes a designer/ adviser who is a principal in their own right.

Situations where the contractor is better resourced than the principal

Essentially, the legal duty is the same regardless of the relative size, resources or influence of the respective parties.

However, in practice, where the contractor has a high degree of expertise and resources in the area in which they are contracting to a less-well-resourced principal, there may be situations where there is a reduced expectation of steps required on the part of the principal. An example might be where a large and specialised telecommunications or waste management company is contracted to supply services to a smaller enterprise, such as a caterer, mechanical repairer, or panel beater.

Selling, leasing or loaning goods and other equipment

The Act does not generally apply to a contract for the sale of goods, although there are exceptions. One exception arises when a contract is for goods and services - for example, a company may have a contract for the purchase of an item of plant which includes a service agreement. In such a situation, if a service technician is required to visit the purchaser's premises to repair the plant, the purchasing company has the duties of a principal.

The duty of principals should be read in conjunction with the duties of people selling or supplying plant for use in a place of work under section 18A, and the duties of designers, manufacturers and suppliers of plant in regulations 66 and 67 of the Health and Safety in Employment Regulations 1995. These are discussed briefly in section 5 below. See also the Guide to the Health and Safety in Employment Act 1992.