Contractor vs. employee NZ: What’s the difference?

To put it simply contractors have more freedom and the businesses they work with have less control over where and how they work. This comes with fewer entitlements and less security. 

Employees, on the other hand, have a bit less freedom and businesses can decide where and how they work. This comes with extra entitlements, certainty and job security. 

Determining whether a worker is an employee or a contractor can be tricky. To figure it out here are a few tests the Ministry of Business Innovation & Employment recommends:

The intention of both parties when entering an agreement is usually described by any contracts they sign. 

• Employees must have an employment agreement. 

• A contractor must have a contractor for services. 

• Contactors don’t get holiday pay, sick leave or public holidays whereas employees do. 

The greater the level of control a business exercises over how, where and when a person works, the more likely they are to be an employee. 

• Contractors generally have control over where, when and how work is completed. Employees don’t. 

• Contractors usually have discretion regarding setting their hours, employees may not. 

• Contractors have control over their availability and can say yes or no to work. Employees generally can’t. 

• Employees are generally supervised, whereas contractors are more self-directed. 

If the work performed by a worker is integral to an employee’s business they’re more likely to be an employee.

• Contractors generally work with their own equipment, employees may not. 

• Contractors may be separate to the general team and not invited to participate in company activities. 

• Contractors are more likely to be paid for results instead of showing up. 

• Employees may be reimbursed for expenses incurred while working. Contractors generally aren’t (instead they build these costs into their invoices). 

The economic reality test looks at the relationship between worker and business and how it functions on a financial level. 

• Contractors pay their own tax, employees don’t. 

• Contractors may pay and charge GST, employees don’t. 

• Contractors are responsible for paying their own ACC levies, employees aren’t. 

• Contractors are entitled to profit off the work that they do for businesses. They can decide how much to charge and how much work to do, whereas employees can’t. 

• Contractors can hire an employee or subcontractor to do the work for them. Employees are required to complete work personally. 

• Contractors are more likely to have their own insurance, to offer guarantees and to incur some level of financial risk when taking on jobs. 

• Contractors often work for several businesses at one time, whereas employees generally only work for one. 

• Contractors may advertise his services, whereas an employee answers a job ad from a business. 

• Contractors usually invoice to be paid, whereas employees are paid automatically. 

The above information is all correct at the time of writing (24/09/2024) but the coalition government has indicated that they intend to amend the Employment Relations Act in 2025 to ‘provide greater certainty for businesses’. 

These changes would include added a test with four criteria - if all four are met then the worker is a contractor:

1. a written agreement with the worker, specifying they’re an independent contractor

2. the business doesn’t restrict the worker from working for another business (including competitors)

3. the business doesn’t require the worker to be available to work on specific times of day or days, or for a minimum number of hours OR the worker can sub-contract the work

4. the business doesn’t terminate the contract if the worker doesn’t accept an additional task or engagement.

If one or more criteria aren’t not met then the tests in the existing legislation would apply.