Contractors versus Employees

We are often asked what the benefits are from have an employee vs contractors. Its important to understand the key differences of both so as to ensure you are complying with Employment Law.

Lets start with the basics and break it down starting with definitions.

Employees

A person employed to do any work under an employment agreement, paid by either wages or salary.
Employees have all minimum employment rights under employments laws such as Employment Relations Act 2000, Minimum Wage Act 1983 and the Holidays Act 2003. Rights include things such as:
- At least the minimum wage
- Holiday and leave entitlements
- A written employment agreement
They also have the right to take a personal grievance.
Employer must keep employee records.

Contractors

Self-employed person, often referred to as a contractor or independent contractor.
Contractors earn income by invoicing the principal for works provided.
Contractors pay their own taxes (or if labour for hire then PAYE) and ACC levies.
Contractors aren’t covered by most employment related laws. What does this mean? No entitlement to:
- Annual leave
- Sick leave
- Can’t take a personal grievance
As a business you don’t have to hold contractor records.
Civil law determines most of their rights and responsibilities.

There are a number of tests that can help to determine the nature of the working relationship and which course might be best suited. As a result there are four court developed tests to help guide you, they are:

Intention Test: When the intended relationship is to be relevant but doesn’t on its own determine the nature of their relationship. You can usually work out what the intention is by reviewing the wording in the written agreement between both parties.
Control vs independence test: This comes down to control exercised over work content, hours and methods. If there is a higher control then its likely they will be an employee, whereas greater freedom to choose who to work for, when and where, tools used etc is more likely to be a contractor.
Integration test: This looks at whether the work performed is fundamental to the employer’s business. Usually work performed by a contractor is supplementary to the business. An employee of an organisation does work that has a benefit for the business rather than the employee and tends to be continuous and not a one-off project.
Fundamental/economic reality test: In this test you look at the whole situation of the work relationship to help determine its economic reality. A contractor is a person in business on their own account.

It is always best to think about your situation and apply all tests to help guide you.

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