Contractors and employees in New Zealand each have different rights and knowing whether you are engaged as an employee or a contractor is important because it determines which rights and responsibilities apply to you.
While both contractors and employees are required to adhere to health and safety regulations, there are many important differences that contractors will benefit from knowing.
Defining employees
An employee is an individual hired to do work in exchange for a salary or other benefits. This contract of services is commonly known as an employment agreement and includes employees who are employed in a three-way employment arrangement. Employees receive remuneration in the form of a wage or salary.
Employees have all the minimum employment rights that are allowed by New Zealand employment laws, including the Employment Relations Act 2000, the Minimum Wage Act 1983, and the Holidays Act 2003. These employment rights include:
- being paid at least the minimum wage;
- holiday and leave entitlements; and
- a written employment agreement.
Employees also have additional rights, such as the ability to bring a personal grievance.
Employees in a triangular employment situation have the right to personal grievance against any third party (controlling party), if they work for that third person. The third party refers to another company or organisation that directs the employee’s work day, (i.e., in a labour-for-hire arrangement). Employers are ‘required to keep records about their employees, including the employee’s employment agreement, wages, holidays, and leave records.
Defining contractors
On the other hand, ‘independent contractors’ and ‘contractors’ are terms that describe self-employed workers. A contractor is an individual who is hired by the principal to perform services in a contract for services; this contract is commonly known as an independent contractor agreement.
Contractors are self-employed individuals who hold their own contractor insurance and make their living by charging the principal for services rendered. Contractors are also responsible for their own tax and ACC levies.
The majority of New Zealand’s employment-related laws do not cover contractors. For example, contractors are not eligible for sick leave or annual leave. They can’t legally bring personal grievances, and they also have to pay their tax. Most of their rights and responsibilities are determined by general civil law. The contractor records of businesses are not required.
Legal tests
To accurately determine whether you are engaged as an employee or a contractor, you will need to carefully consider the true nature of your relationship with the employer. There are four legal tests that you can apply to help you to spot the difference. These are:
• The Intention test;
• The Control vs Independence test;
• The Integration test; and
• The Fundamental/economic reality test.
Think about your situation, and then use these tests to help guide you. There is no single test that will provide the answer. Employment Mediation Services can help you to determine the nature of your relationship if you are still uncertain after applying these tests.
What employers need to know
Sometimes employers mistakenly, or deceitfully, label employees as contractors, without realising the consequences of doing so. This can lead to what’s called ‘sham contracting’, instances of which are monitored and acted upon by the Employment Relations Authority and may result in penalties for employers.
A sham contracting arrangement occurs if an employer deliberately attempts to disguise the true nature of an employment relationship as an independent contracting arrangement. This may be done as a way for the employer to avoid their responsibility for employee entitlements.
If sham contracting is identified, the Employment Relations Authority may enforce penalties against the employer in question. The Employment Relations Authority does not support sham contracting arrangements and the employer will still have to give the employee their employment entitlements. The employer may also be penalised and be held liable for additional costs that may include:
- unpaid PAYE tax;
- unpaid minimum wages; and
- holidays and leave entitlements.
What employees need to know
Being incorrectly hired as a contractor instead of an employee can lead to you losing the minimum employment entitlements for New Zealand residents. You may also pay ACC levies that you do not need to.
When you hire an individual as a contractor, they may in time become an employee and the nature of their relationship with your business will change.
Reduce your risk with contractor insurance
There’s no doubt that contractors can encounter health and safety risks in the course of performing their trade services. But business insurance such as contractor insurance can be an effective and proactive means of reducing the risks to your business and your employees. BizCover can tailor your contractor insurance to match your specific risks and needs.
BizCover helps contractors in New Zealand to reduce the risks to their business via contractor insurance. Choose BizCover for your contractor insurance, get covered in minutes without drama, and get on with your day. If you’d like chat you can find us at 0800 249 268.
*This information is general only and does not take into account your objectives, financial situation or needs. It should not be relied upon as advice. As with any insurance, cover will be subject to the terms, conditions and exclusions contained in the policy wording. © 2022 BizCover Pty Limited. BizCover Limited is owned by BizCover Pty Ltd (ABN 68 127 707 975).
