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Ask our specialist – What is the difference between contractors and employees?

Ask our specialist – What is the difference between contractors and employees?

Given the difference between employees and independent contractors, getting the employee classified correctly in the first place is hugely important. There are some simple definitions.

Definitions.

Employee.

An employee is defined as someone employed to do any work under an employment agreement. This is significant as it will mean the individual is entitled to all the minimum employment rights. The most obvious ones being they receive at least the minimum wage, holiday entitlements, and have a written employment agreement.

In the case of an employee, an employer is required to keep records such as the employment agreement and pay records.

Independent Contractor.

A contractor will quite often be self-employed and is engaged by someone to perform services outlined in a contract. An independent contractor agreement is different to an employment agreement, with another key difference being a contractor paying their own ACC levies and taxes.

For employers, or business owners, contractors are not covered by any employment laws and are not entitled to things like annual leave or sick leave. Business owners also do not have to maintain contractor records.

Legal tests.

To get the classification correct, there are some legal tests which can be used for employers to tell the difference. These tests are:

Intention test.

This test examines the intention of the relationship and is usually based heavily on how the contract or agreement is written. For example, it will examine whether there is an employment agreement, or whether there is holiday pay outlined.

Control v independence test.

Depending on the control the individual has over their own work can be an indicator of the employment relationship. A worker able to choose more freely where they work, when they work, tools used etc will likely be a contractor where as an employee will be much more clearly controlled.

Integration test.

A worker will more than likely be considered an employee if they are fundamental to the business on an ongoing basis. A contractor will typically complete tasks that are required as a one-off situation.

Fundamental/ economic reality test.

One of the more definitive tests, this examines the total situation of the work relationship. The test will look ultimately at whether the individual is in business with their own account, or paid as an employee.

What if employers get it wrong?

Hiring an individual as a contractor, when they are in fact an employee can lead to several scenarios in which employers will be far worse off than if they had gotten it right in the first place.

In addition to potentially not paying the correct taxes, employers failing to manage an employee correctly leave themselves open to underpaying staff, missing key employee entitlements which may lead to action from the Employment Relations Authority with fines in the tens of thousands.

Getting it right in the first place is vital, and setting up policies and procedures in line with the correct classification is the place to start. For advice contact Employsure on 0800 675 700.

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