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Contractors vs Employees

Jason Ennor, Co-founder and CEO at MyHR
by, Jason Ennor, Co-founder and CEO at MyHR

A practical guide to approaching a common question which could cause significant issues.

I am regularly asked to give an opinion on the difference between contractors and employees. Usually this is because the parties want to set up a contractor relationship and all too often the relationship is better defined as employment.

Sometimes the individual is seeking a contracting relationship for perceived tax benefits. They may tell an employer that they “choose” to be a contractor and they’re “ok waiving their employment rights” in favour of an independent contractor relationship.

However, this choice is not theirs to make. The nature of the relationship defines whether somebody is an independent contractor or an employee. People cannot choose to opt-out of employment entitlements and people also cannot opt-out of their statutory tax requirements.

Getting this wrong can cause significant issues and cost on two fronts; Tax and Employment Law

So how do you know?

There is plenty of advice available online to help with this. Type “contractor” into the search fields of the IRD websiteIRD and the MBIE websiteMBIE Both have useful comparison tables.

For a less formal, common sense assessment, remember:

“If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.”

Employees are in a contract “of service” serving the employer. They are told what to do. Hours are generally fixed and they dedicate their time and effort primarily to one organisation. They are provided tools to complete the work. They must apply for time off.

This means they’re paid by a payroll system, with PAYE deductions. They’re eligible for KiwiSaver and covered by employment law.

Contractors are working in a contract “for service” serving themselves by delivering outcomes to their clients. They are self-employed and can work freely for a number of organisations. They dictate their own time-off and may or may not be available for work. They provide their own equipment and tools.

They invoice for their work and if they earn over $60,000 in a year they must be GST registered.

It is usually obvious, although sometimes project work of fixed duration or finite funding might be debated. But in most cases the same rules above can be applied and a position and fixed term employment could apply.

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A couple of practical tests I recommend which can really highlight the true nature of the relationship are: Termination: if both parties are comfortable with the understanding that the work may cease at short notice and without any process, then it is likely a contractor relationship. However, if the individual would feel aggrieved and being told “don’t come Monday” then they may have an expectation of fixed hours and ongoing work, this means they are more likely an employee.

Leave: if both parties are comfortable with the individual “booking themselves out” for periods of time at their own discretion, then it is likely a contractor relationship. But if the employer would feel upset at the individual announcing their intention to be “away for a couple of months” then there is an expectation that the person is available at the employer’s requirement and should apply for leave; this is an employee.

If the duck test or the termination test or the leave test don’t give you a clear view, then try the more formal checklists at IRD and MBIE or seek some professional advice.

But don’t run the risk of falling foul of tax laws or labour laws. It’s not worth it.

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