Contractor versus employee
Employees and contractors have different rights and responsibilities. You need to know whether you’re an employee or a contractor because your rights and responsibilities will be very different.
Health and safety laws apply to employees and contractors. Definitions
An employee is a person employed to do any work for hire or reward under a contract of services (commonly called an employment agreement). This includes people working in a triangular employment situation.
The hire or reward is almost always a wage or salary.
Employees have all minimum employment rights under employment laws (eg the Employment Relations Act 2000, Minimum Wage Act 1983 and the Holidays Act 2003), eg:
at least the minimum wage,
holiday and leave entitlements, and
a written employment agreement.
Employees also have extra rights, like the right to take a personal grievance.
In addition, employees in triangular employment situations have personal grievance rights against the third party (controlling third party) when they work under that third party. The third party is another business or organisation that directs or controls the day-to-day work of the employee, eg a labour-for-hire situation.
The employer must keep employee records such as their employees’ employment agreement, and wage, time, and holidays and leave records.
Self-employed people are sometimes referred to as contractors, or independent contractors; these terms mean the same thing. A contractor is 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 and earn income by invoicing the principal for their services. A contractor pays their own tax and ACC levies.
Contractors aren’t covered by most employment-related laws. This means they don’t get things like annual leave or sick leave, they can’t bring personal grievances, they have to pay their own tax, and general civil law determines most of their rights and responsibilities. Businesses don’t have to hold contractor records.
There are many differences between contractors and employees that affect the rights and responsibilities of the organisation and the employee.
To make the correct decision you must focus on the real nature of the working relationship not just the label the parties are calling it. The courts have developed some legal tests to help you tell the difference, they are:
Control vs independence test
Fundamental/economic reality test
You need to think about your situation and apply all the tests to help you to decide. No one test will give you the correct answer. If you are still unsure after you’ve applied the tests, Employment Mediation Services can help you decide the real nature of your relationship, or you should seek legal advice.
If you get it wrong
Some employers accidentally classify employees as contractors not realising the consequences of their mistake.
A sham contracting arrangement happens if an employer deliberately attempts to disguise an employment relationship as an independent contracting arrangement. This is usually done so the employer can avoid their responsibility for employee entitlements. The Employment Relations Authority will not support a sham contracting arrangement and the employer will still have to give the ‘employee’ their employment entitlements. The ‘employer’ may also receive penalties against them.
If you are hired as a contractor incorrectly rather than as an employee, then you may miss out on your minimum employment entitlements and KiwiSaver employer subsidy (NZ resident).
You may also pay tax and ACC levies that you should not have to.
If you hire someone as a contractor when they are actually an employee, you may later be held liable for extra costs including eg:
unpaid PAYE tax
unpaid minimum wages
holidays and leave entitlements.
You may also be at risk of receiving penalties from Inland Revenue and/or the Employment Relations Authority (that could be both costly and harm your reputation). You may also be declined approval to bring in workers from overseas.