FINANCIAL LITERACY • 30 OCTOBER 2023 • 4 MIN READ

Contractor vs employee - know the difference

A man working as a builder inside a house, representing that builders can work as either a contractor or employee

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What is an employee?

What is a contractor?

Contractor vs employee: how to tell the difference?

If you are looking for work or hiring someone, you need to know the difference between a contractor and an employee in New Zealand. These two types of workers have different rights and responsibilities under New Zealand law, and it’s important to understand them before entering into any agreement.

In this article, we’re going to give you more information on what an employee is, what a contractor is, and 5 tests to distinguish them.

What is an employee?

An employee is a person who works for an employer under a contract of service, also known as an employment agreement. This contract sets out the terms and conditions of the employment, such as the job description, hours of work, pay rate, leave entitlements, dispute resolution and termination process. An employee has all the minimum employment rights under the Employment Relations Act 2000, the Minimum Wage Act 1983 and the Holidays Act 2003, such as:

at least the minimum wage
annual leave, sick leave and bereavement leave
a written employment agreement
protection from unfair dismissal and discrimination
the right to join a union and bargain collectively
the right to take a personal grievance

What is a contractor?

A contractor (independent contractor) is a self-employed person who provides services to a principal under a contract for service, also known as an independent contractor agreement. This contract specifies the scope, duration, fee and payment terms of the service, as well as any other relevant details. An independent contractor doesn’t have the same employment rights as an employee, but they have more control over their work, such as:

choosing when, where and how to work
setting their own rates and invoicing for their services
paying their own tax (e.g., income tax, GST if applicable) and ACC levies
managing their own expenses and risks
owning their own tools and equipment

Contractor vs employee: how to tell the difference?

Sometimes it can be difficult to tell whether you or your worker is an independent contractor or an employee, especially if they have some characteristics of both. The label that the parties use is not enough to determine the true nature of the relationship.

Under the Employment Relations Act 2000, there are certain tests to distinguish between these two types of workers. These principles have also been adopted by the IRD and the tax courts.

Fundamental/Economic reality test
Control test
Intention test
Independence test
Organisation test

Fundamental/Economic test

Fundamental/Economic test looks at the economic reality of the relationship between the worker and the employer, rather than the formal labels or contracts they use.

A self-employed person is usually in business taking risks (e.g., paying for their own taxes and expenses) to make profits, whereas a person working for someone else generally receives wages or salaries.

If most of the factors below apply, then the person is likely to be a contractor. However, no single factor is decisive and you should consider the overall picture.

Table showing fundamental/economic test comparing key areas like wages, expenses, taxes, GST, ACC and superannuation

Control test

The control test is a way of figuring out if someone is an employee or a contractor based on how much control they have over their work. The test looks at factors like how much the worker depends on the employer for income, how much the worker can set their own schedule and choose their own projects, how much the worker invests in their own equipment and tools, and how they perform the job.

In short, the more control the worker has, the more likely they are a contractor. The less control they have, the more likely they are an employee.

Table showing control test including areas like work hours, control over availability and supervision

Intention test

This test looks at the nature of the relationship. For example, did they sign an employment agreement or a contract for services? Are they entitled to leave and sick leave? Are they getting paid for public holidays? How do they deal with the dispute?

In some cases, the intention test will most likely be the determining factor when a contract says someone is a contractor and all other tests show the person is actually an employee.

Table showing the intention test including areas like leave and sick leave, public holiday, and dispute processes

Independence test

Independence test determines who they work for, where they work and do they provide their own tools and vehicle. Key questions include do they have to work exclusively for them or can they work for other clients? Do they have various locations of work? Do they have to use their own tools or equipment or are they often supplied?

Organisation test

This test looks at whether the person is part of the business. Do they work full time for the company or do they perform one off contracts? Do they wear the company’s uniform or logo? Do they get reimbursed for work-related expenses? Generally, the more integrated they’re into the organisation, the more likely they are employees. The more separate and distinct they are, the more likely they are contractors.

These tests are not conclusive by themselves, but they can provide some guidance. If you’re still unsure after applying these tests, you should seek professional advice (e.g., Beany).

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