Contractors and employees – what’s the difference?

Section 6 of the Employment Relations Act 2000 defines “employee” as any person employed by an employer to do any work for hire or reward under a contract of service. Contractors, on the other hand are engaged to carry out work for a principal under a contract for service. Surprisingly, arguments as to whether someone is an employee or a contractor (although they are usually arguing the former) are not uncommon.

The distinction is important because employees and contractors have different rights under New Zealand’s employment laws and tax laws. Because of these implications, it is important that employers have a clear understanding as to whether they are employing an employee or engaging a contractor.

Whilst each inquiry in the Employment Relations Authority or the Employment Court will be highly fact specific when the institution is faced with the argument, outlined below are some factors which the Authority and the Court will consider relevant, or irrelevant, when determining the true nature of the relationship of a worker providing services to a business.

Factors for employees Factors for contractors Neutral factors
The worker is paid on a salary The parties are in business together The fact that an employment agreement states the worker is an employee or a contractor
There is an employment agreement between the parties The worker is offering their services through a company The fact that a worker’s email signature states they are an employee of the company
The company can control the work the worker does and how it is done The company has no control over the work the worker does
The company handles the workers PAYE and KiwiSaver The worker pays their own taxes

 

The worker is entitled to leave (such as annual leave, sick leave, bereavement leave, etc). The worker sets their own hours
The company provides equipment (such as tools, uniforms, etc.) The worker provides their own equipment
The worker is integral or has been integrated in to the company The worker takes financial risk

The factors above are a helpful guide and have been created as a result of the judicial tests of intention, control vs independence, integration, and the economic reality tests which have been developed in this area. However they are not determinative of the nature of the relationship when looked at in isolation. The Authority/Court will look at the relationship at a whole, alongside the intention of the parties (if this can be ascertained) to determine the status of the worker. Ultimately, the Authority/Court will be required to establish the “true nature” of the relationship

Obviously the distinction is an important one, particularly if an employer thinks they have engaged a contractor but the true nature of the relationship is found to be one of employment. This would make the employer liable for back paying the newly deemed employee for any periods of leave taken during the period in which they were considered to be a contractor!

Workplace Law team

If you have any queries in respect of the above, or any other Workplace Law issues, please contact a member of Lane Neave’s Workplace Law team:

Employment: Andrew Shaw, Fiona McMillan, Gwen DrewittMaria Green,  Hannah Martin, Joseph HarropHolly StruckmanAlex Beal, Giuliana Petronelli, Abby Shieh
Immigration: Mark Williams, Rachael Mason, Daniel Kruger, Nicky Robertson, Julia StrickettKen Huang, Mary Zhou, Shi Sheng Cai (Shoosh)Sarah Kirkwood, Janeske SchutteLingbo Yu
ACC: Andrew Shaw
Health and Safety: Andrew ShawFiona McMillan

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