Is that new team member a contractor or an employee? It’s important to know the difference because getting it wrong could be an expensive mistake.
Many business owners like the flexibility and lower risk of taking on a contractor rather than an employee, particularly if they are new to being an employer. Except for a few industries, like the construction sector, it is most likely you are taking on an employee.
The Employment Court has recently issued three warnings to employers who have tried to label their employees ‘contractors’, in a deliberate effort to avoid their obligations to employees (a ‘sham contracting arrangement’). Others have made this mistake unintentionally. If you do make this error, your business could be liable for unpaid PAYE and holiday pay, as well as potentially being penalised by Inland Revenue and/or the ERA.
What’s the difference?
Employees are more protected than contractors but have less flexibility. They receive KiwiSaver contributions, PAYE tax is paid on their behalf, and they cannot have their employment terminated without following the correct processes.
Contractors have fewer protections and more freedom. They pay their own GST, income tax and Accident Compensation Levies. They don’t receive holiday pay, sick leave or parental leave. Often their contracts can be terminated at short notice, depending on the fine print.
Health and safety obligations apply to both employees and contractors.
Defining an employee and a contractor
There are some important distinctions between an employee and a contractor. You can read a more detailed explanation here, but the four main areas to examine are:
- Intention: What’s in the written agreement; is it a contract for services or an employment contract?
- Independence: How much control do you have over the worker’s hours, methods and activities? Do they supply their own tools? Do they work onsite or remotely? The more control you have, the more they’re likely to be an employee.
- Integration: Is the work fundamental to the business or supplementary?
- Economic reality: Is the worker in a business on their account? Or is your business their only “customer”?
Employers must keep detailed employee records. We recommend using a good payroll system such as SmartPayroll to ensure you comply with all the requirements and get those calculations correct.
Employees must have an employment contract that complies with the Employment Relations Act 2000, Minimum Wage Act 1983 and the Holidays Act 2003.
Talk to us if you’re in doubt.
Don’t be caught out! Give us a call if you have any questions about your contractors’ status and we can help walk you through some of the basic considerations, and recommend further assistance if required.
