Everyone
Employee or contractor?
Contractors are not employees and as such are not covered by the same laws, rights and obligations as employees. Learn the difference between these 2 types of workers.
Difference between an employee and a contractor
Employee
An employee is a person employed to do any work for wages or a salary under an Employment agreements contain the terms and conditions of employment. Every employee must have a written employment agreement outlining the terms and conditions of employment. ‘Employment agreement’ has a broader meaning that includes all other documents and other agreements forming part of the contractual agreement between the employee and employer.
Triangular employment situation
Employees:
- receive a wage or salary
- have an employment agreement with their employer.
Employee rights and responsibilities
An employee is not a sharemilker.
Contractor
A contractor (also known as a self-employed person or independent contractor) is engaged to perform services under ‘a contract for services’.
Contractors:
- are self-employed and earn income by invoicing for their services
- do not have an employment agreement
- are not covered by most employment-related laws and the Employment Relations Act 2000
- cannot bring personal grievances, and general civil law determines most of their rights and responsibilities.
Health and safety laws apply to both employees and contractors.
Your rights and obligations – WorkSafe(external link)
Employment Relations Act 2000 - New Zealand Legislation(external link)
Legal tests that help decide whether someone is an employee or a contractor
The courts have developed 4 legal tests to help decide whether someone is an employee or a contractor. Each situation needs to be considered and the tests below will help you to work out if someone is an employee or a contractor. No one test will give you the correct answer.
The legal tests:
- Intention test
- Control vs independence test
- Integration test
- Fundamental/economic reality test.
What the parties intended the relationship to be matters, but it does not on its own determine the true nature of their relationship. The employee can usually work out what the intention is from the wording in their written agreement.
| Employee | Contractor | Example | |
|---|---|---|---|
| Employment agreement | Yes | No | An employee must have a written employment agreement. |
| Contract for services | No | Yes | A contractor has a ‘contract for services’, rather than an employment agreement. |
| Holiday pay | Yes | No | A contractor doesn’t get paid holidays. An employee must get paid holidays. |
| Entitlements for working on public holidays | Yes | No |
A contractor doesn’t get paid time-and-a-half for working on a public holiday or receive an alternative holiday (unless agreed). An employee must be paid at least time-and-a-half for working on a public holiday and an alternative holiday if it is an otherwise working day for them. |
Generally, an employer has greater control over an employee's work content, hours and methods. The greater the control over the work content, hours and methods, the more likely it is that the person is an employee. A worker with greater freedom to choose who to work for, where to work, when to work, the tools used and so on, is more likely to be a contractor.
| Employee | Contractor | Example | |
|---|---|---|---|
| Control over work, time, location | No | Yes | An employee usually has little or no control over the work to be done. The employer largely directs where, when, what and how they work. |
| Set hours | Yes | No | A contractor generally has more discretion about when and how much time is spent at work compared with an employee who will likely have set times and days to be at work. |
| Control over their availability | No | Yes |
A contractor generally has more control over their own availability to provide services. For example, they may make themselves unavailable on certain days of the week, or for a longer period because they’re going on holiday. An employee generally has to request permission from their employer to take time off work. |
| Supervision and direction | Yes | No | A contractor has their own ‘plan’ of what work to do each day and which site to work at. They are usually a specialist in their field of work, and do not need to be closely supervised or instructed how to do their job. |
This test looks at whether the work the employee does is fundamental to the employer’s business (and whether you are ‘part and parcel’ of the organisation). Usually, the work performed by a contractor is only a supplementary part of the business.
It is more likely to be considered as an employee of the organisation if the work is:
- the type that is commonly done by employees
- continuous (not a one-off project)
- for the benefit of the business rather than for the benefit of the worker.
| Employee | Contractor | Example | |
|---|---|---|---|
| Works with own equipment | No | Yes |
For an employee, the employer usually provides all tools and equipment to do the work. For example, a work van. A contractor generally provides their own tools and specialist equipment. |
| Team integration | Yes | No |
A contractor is less likely to be integrated into the team. For example, they are not invited to organisation events. |
| Paid by results | No | Yes | An employee usually has a set fee for their work. For example, a salary or wage, whereas a contractor may be paid by results (for example, a builder who is paid by build progress). |
| Reimbursed for work-related expenses, for example travel, petrol, equipment hire | Yes | No | An employee is more likely to be reimbursed for work-related expenses whereas for a contractor, these form part of the costs of running their business. |
| Uniform that has the logo of the company working for | Yes | No | An employee is likely to wear the employer’s uniform (if it has one). A contractor would usually supply their own branded clothes. |
This test involves looking at the total situation of the work relationship to determine its economic reality. A contractor is a person in business on their own account.
| Employee | Contractor | Example | |
|---|---|---|---|
| Fees | No | Yes |
A contractor usually charges a fee for their services, whereas an employee is paid a salary or a wage. |
| Minimum wage | Yes | No |
A contractor can be paid whatever rate is agreed to. An employee must receive at least the minimum wage for all hours worked. |
| Pays tax directly to IRD | No | Yes |
For an employee, the employer pays PAYE tax and ACC on the employee’s behalf, and the employee is paid net wages or salary. A contractor generally pays their own tax directly to IRD. In special situations, the company or person the contractor is contracted to may deduct withholding tax on their behalf. |
| GST registration | No | Yes |
A contractor must register for GST if they are earning over $60,000. |
|
ACC levies |
No | Yes | A contractor is responsible for paying their own ACC levies. |
| Profit | No | Yes |
A contractor is able to profit from their work. For example, they can often decide how much to charge for their services, and how many jobs to take on. |
| Have employees do the work | No | Yes |
An employee is required to perform their job personally and is not able to engage anyone to replace them at work. A contractor can often get someone else to do the work instead of them either by subcontracting the work or employing their own employees. |
| Financial risk | No | Yes | A contractor carries financial risk. For example, they may not profit from a job if their costs exceed budget. They may also give guarantees to cover breaches of their responsibilities. They may carry their own insurance to help protect against these risks. |
| Mainly working for one entity | Yes | No | A contractor may work for multiple principals at the same time. For example, a builder having contracts to do work for Company ‘A’, Company ‘B’ and Company ‘C’. |
| Advertises for work | No | Yes | An employee looks for work – for example, answers a job ad looking for work compared with a contractor who often advertises their services. |
| Invoices | No | Yes |
A contractor usually issues invoices setting out their fees or charges to get paid. An employee usually gets paid automatically and receives a pay slip. |
Employee: If you get it wrong
If you are incorrectly hired as a contractor rather than as an employee, you may miss out on:
- your minimum employment entitlements (for example, annual holidays and sick leave)
- your KiwiSaver superannuation subsidy.
You may also pay tax and ACC levies that you should not have to.
What to do if you cannot agree on employer/contractor status
If there is a dispute about whether someone is an employee or a contractor, you can call us for help. You can call our Service Centre to help guide you through the information, or our early resolution team can also help you resolve issues quickly and informally.
Call our Service Centre: 0800 20 90 20
If these services do not help you find a solution you can use our mediation service, or you can make an application to the Employment Relations Authority (the Authority) for a determination. You’ll have to pay fees for applying to the Authority.