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Contractor versus employee

Employees and contractors have different rights and responsibilities.

You need to know whether you’re an employee or a contractor because your rights and responsibilities will be very different.

Health and safety laws apply to employees and contractors.

Definitions 

Employees Contractors
An employee is a person employed to do any work for hire or reward under a contract of services (commonly called an employment agreement). The hire or reward is almost always a wage or salary.

Employees have all minimum employment rights under employment laws (eg the Employment Relations Act 2000, Minimum Wage Act 1983 and the Holidays Act 2003), eg:

  • at least the minimum wage,
  • holiday and leave entitlements, and
  • a written employment agreement.

Employees also have extra rights, like the right to take a personal grievance.

The employer must keep employee records such as their employees’ employment agreement, and wage, time, and holidays and leave records.

Self-employed people are sometimes referred to as contractors, or independent contractors; these terms mean the same thing. A contractor is engaged by a principal (the other party) to perform services under a contract for services (commonly called an independent contractor agreement).

Contractors are self-employed and earn income by invoicing the principal for their services. A contractor pays their own tax and ACC levies.

Contractors aren’t covered by most employment-related laws. This means they don’t get things like annual leave or sick leave, they can’t bring personal grievances, they have to pay their own tax, and general civil law determines most of their rights and responsibilities. Businesses don’t have to hold contractor records.

There are many differences between contractors and employees that affect the rights and responsibilities of the organisation and the employee.

Legal tests

To make the correct decision you must focus on the real nature of the working relationship not just the label the parties are calling it. The courts have developed some legal tests to help you tell the difference, they are:

  • Intention test
  • Control vs independence test
  • Integration test
  • Fundamental/economic reality test

You need to think about your situation and apply all the tests to help you to decide. No one test will give you the correct answer. If you are still unsure after you’ve applied the tests, Employment Mediation Services can help you decide the real nature of your relationship, or you should seek legal advice.

If you get it wrong

  • Some employers accidently classify employees as contractors not realising the consequences of their mistake.
  • A sham contracting arrangement happens if an employer deliberately attempts to disguise an employment relationship as an independent contracting arrangement. This is usually done so the employer can avoid their responsibility for employee entitlements. The Employment Relations Authority will not support a sham contracting arrangement and the employer will still have to give the ‘employee’ their employment entitlements. The ‘employer’ may also receive penalties against them.
Employees Employers
If you are hired as a contractor incorrectly rather than as an employee, then you may miss out on your minimum employment entitlements and KiwiSaver employer subsidy (NZ resident).

You may also pay tax and ACC levies that you should not have to.

If you hire someone as a contractor when they are actually an employee, you may later be held liable for extra costs including eg:
  • unpaid PAYE tax
  • unpaid minimum wages
  • holidays and leave entitlements.

You may also be at risk of receiving penalties from Inland Revenue and/or the Employment Relations Authority (that could be both costly and harm your reputation). You may also be declined approval to bring in workers from overseas.

What the parties intended the relationship to be is relevant, but it doesn’t on its own determine the true nature of their relationship. You can usually work out what the intention is from the wording in the parties’ written agreement.

 EmployeeContractorExample
Employment agreement (contract of service) Yes No An employee MUST have a written employment agreement (contract of service)
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.

The greater the control exercised over the worker’s work content, hours and methods, the more likely it is that a 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.

 EmployeeContractorExample
Control over work, time, location No Yes An employee usually has little or no control over the work to be done eg where, when, what, how ie the employer largely directs their work.
Set hours Yes No A contractor generally has more discretion regarding 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 eg 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 so do not need to be closely supervised or instructed how to do their job.

This test looks at whether the work performed by the person is fundamental to the employer’s business (and whether they are ‘part and parcel’ of the organisation). Usually the work performed by a contractor is only a supplementary part of the business.

A person is more likely to be considered to be 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. 
 EmployeeContractorExample
Works with own equipment No Yes For an employee, the employer usually provides all tools and equipment to do the work eg 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 eg not invited to organisation events.
Paid by results No Yes An employee usually has a set fee for their work eg a salary or wage, whereas a contractor may be paid by results.
Reimbursed for work-related expenses eg 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), whereas, 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.

 EmployeeContractorExample
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 IR 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 the IR.

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 earning over $60,000
ACC bill 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 him/her either by subcontracting the work, or employing their own staff.
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 eg 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 eg answers a job ad looking for a worker, compared with a contractor who often advertises their services.
Invoices No Yes A contractor usually issues invoices setting out their fees or charges in order to get paid. An employee usually gets paid automatically, and receives a pay slip.

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