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Employee vs Contractor - Do you know the difference?

May 30, 2016

There are many differences between contractors and employees that affect the rights and obligations of the business and the worker. Note: Don’t get it wrong as it may cost you,

To make the correct decision you must focus on the real nature of the working relationship not just the label the parties have given it. The courts have developed some legal tests to help you tell the difference. You will need to consider all the points that apply to your case to help you decide. No individual point provides the answer.

The Ministry of Business, Innovation & Employment have produced a booklet that will help you with these points Employee vs Contractor - Know the Difference If you are still unsure after you’ve read this document you should seek legal advice.

Why do I need to know the difference between an employee and a contractor? – Here a just a few examples….

Employers: If you hire someone as a contractor when they are actually an employee, you may later be held liable for extra costs including: unpaid PAYE tax, unpaid minimum wages, holidays and leave entitlements. You may also be at risk of receiving penalties from the IRD and/or Employment Relations Authority (that could harm your reputation). Also you may be declined approval to bring in workers from overseas.

Employees: If you are hired as a contractor incorrectly rather than as an employee, then you may miss out on your minimum employment rights and your KiwiSaver employer subsidy (NZ Resident), plus you may end up paying tax and ACC levies that you didn’t have to.

What are the main rights and obligations related to employee’s vs 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 must get: 1) at least the minimum wage, 2) holiday and leave entitlements and 3) an employment agreement. Employees also have extra rights, like the right to take a personal grievance. Also, the employer must keep employee’ records such as an employment agreement and wage-keeping details.

A contractor is a person 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. He/she earns income by invoicing the principal for their services. A contractor must pay his/her own tax and is responsible to pay ACC levies. Contractors are not covered by employment laws. They are not eligible for employment entitlements (like paid holidays) unless such rights are agreed as part of their contract. Businesses don’t have to hold contractor records.

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