Contractor vs Employee

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Staff Member or Contractor

Is the difference between an employee and a contractor not just splitting hairs?

“If my guys choose to be contractors, what does it matter to me? Why would I want to change that – it’s cheaper for the business, isn’t it?”

According to the New Zealand Labour Inspectorate, if you hire someone as a contractor when they are actually an employee, you may one day be held liable for extra costs including:

  • unpaid PAYE tax
  • unpaid minimum wages
  • statutory holidays, kiwisaver and leave additional entitlements

You may also be at risk of receiving penalties from the IRD and/or Employment Relations Authority. These are on the permanent public record and could harm your reputation. It is also possible to be denied approval to bring in workers from overseas for a fixed period of time.

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:

  • at least the minimum wage
  • holiday and leave entitlements; and
  • an employment agreement

Employees also have extra rights, like the right to take a personal grievance. The employer must keep employee records such as an employment agreement and wage-keeping details.

On the other hand, a contractor is a person engaged by you/a principal to perform services under a contract for services (commonly called an independent contractor agreement).

Contractors are:

  • self-employed
  • earn income by invoicing the principal for their services
  • must pay his/her own tax; and
  • responsible to pay ACC levies

Contractors are not covered by employment laws. They are not eligible for employment entitlements (like paid holidays) and businesses don’t have to hold contractor records. As such, the current Government prefers employment relationships to contract relationships because they offer better protection and entitlements to workers. In fact, in 2020 Labour made and election promise to introduce a category of worker called “Dependent Contractors” that has many of the freedoms of a contractor, and some of the rights of an employee. This is a bid to protect workers from what the Government sees as the risks and vulnerabilities of contractor life. Keep your eye out for this development, and meantime ensure you have all the documents you need to evidence you have the right relationship with all your workers.

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