Contractor vs employee in NZ: the legal tests and when each makes sense

Employees are covered by the Employment Relations Act, the Holidays Act, minimum wage law and the personal grievance system. They get paid annual leave, sick leave and public holidays, KiwiSaver employer contributions, and protection against unjustified dismissal. Contractors get none of that. They invoice for their work, manage their own tax and ACC, and can be engaged and ended according to the contract.

The financial difference is large, which is exactly why the courts and the Employment Relations Authority look past the label. If a person engaged as a contractor is found to have been an employee all along, the employer can be liable for years of unpaid holiday pay, KiwiSaver contributions and penalties, and the person gains the right to raise a personal grievance.

This guide is general information, not legal advice. The law in this area has been the subject of high-profile cases and proposed reform, so confirm the current position on the Employment New Zealand website and take advice on any arrangement that is not clear-cut.

Section 6 of the Employment Relations Act asks whether a person is employed "under a contract of service" (employee) or "for services" (contractor), and directs that the real nature of the relationship be determined by looking at all relevant matters, not just what the contract says. The courts apply four overlapping tests.

1. Intention

What did the parties intend? A written contractor agreement is evidence of intention but not decisive. If everything else points to employment, the label loses.

2. Control

How much does the business control the work? Employees are typically told when, where and how to work, are supervised and are subject to the business's policies. Contractors decide how to deliver an agreed outcome, often set their own hours and can usually send someone else to do the work.

3. Integration

How embedded is the person in the business? Employees are part of the organisation: they have a company email, appear on the org chart, use company equipment, attend team meetings and are presented to customers as staff. Contractors sit outside it, delivering a defined piece of work.

4. Fundamental or economic reality

Is the person genuinely in business on their own account? Indicators include invoicing, having other clients, carrying their own insurance and tools, bearing financial risk, being able to make a profit or loss, advertising their services and being free to work for others. A "contractor" who works full-time for one business for years, on that business's equipment, at an hourly rate, with no other clients, looks like an employee under this test regardless of the paperwork.

Indicator	Points to employee	Points to contractor
Hours and location	Set by the business	Set by the worker
Supervision	Managed day to day	Delivers to an agreed outcome
Substitution	Must do the work personally	Can send someone else
Equipment	Provided by the business	Provides their own
Payment	Wages or salary, PAYE	Invoices, own tax and GST
Other clients	Works only for the business	Free to work for others, and does
Financial risk	None	Can profit or lose on the job
Duration	Ongoing, open-ended	Defined project or term
Integration	On the org chart, team meetings, company email	Outside the structure

No single row decides it. A court weighs the whole picture. But if most of your answers land in the left column, the person is probably an employee.

• Back-pay. Annual leave, public holidays, sick leave and KiwiSaver contributions for the whole period of engagement, which can run to years.
• Penalties. The Employment Relations Authority can impose penalties for breaches of minimum entitlements, and the Labour Inspectorate can investigate.
• Personal grievances. A misclassified contractor whose engagement was ended can claim unjustified dismissal.
• Tax exposure. Inland Revenue may pursue PAYE that should have been deducted.
• Health and safety. Your duties under the Health and Safety at Work Act apply to contractors too, but confusion about status leads to gaps.
• Reputation. Cases in this area attract attention, and in a small market that follows you.

The employers most at risk are not those with a deliberate strategy; they are SMEs that engaged someone "as a contractor for a few months" and never revisited it as the arrangement quietly became permanent.

Contracting is a legitimate and valuable arrangement when it reflects reality:

• Defined projects. A plant commissioning, an ERP implementation, a lean transformation with a start and an end.
• Specialist skills you need occasionally. A process safety engineer, a quality systems auditor, a fractional CFO.
• Interim cover. Parental leave, a sudden resignation in a senior role, or holding a position while a permanent search runs.
• Genuine independents. People who run a consulting business with several clients and want to keep it that way.

In these cases the person really is in business on their own account, controls how they deliver, and the engagement has a natural end. That is what the tests are looking for.

There is a third model that sits between the two, and it removes most of the classification risk: contract recruitment through an agency. The contractor is engaged and paid by the agency, which handles PAYE or the contractor's invoicing, ACC, insurance and, where applicable, holiday pay. You receive an agreed hourly or daily rate and a person for a defined period. When the project ends, so does the engagement, cleanly.

For SMEs this is often the right answer when a senior or specialist role needs covering for three to twelve months: an interim Operations Manager during a restructure, a Project Engineer for a plant upgrade, a Financial Controller through a system change. Our contract recruitment service works this way for senior and specialist roles in operations, engineering, supply chain, technical and finance. We do not do temp or labour hire; these are experienced people stepping into leadership and specialist gaps.

Contract-to-permanent is also common. A person comes in on a contract, both sides get a genuine look at each other, and if it works the role is converted with a proper employment agreement. It is a far better trial than a 90-day trial clause.

1. Is there a defined outcome or period? If the honest answer is "ongoing", it is probably a job.
2. Will they control how and when the work is done?
3. Do they have, or could they have, other clients?
4. Will they provide their own equipment and carry their own insurance?
5. Can they substitute someone else?
6. Is the written agreement a contract for services, reviewed by someone who knows the difference?
7. Have you diarised a review date? Arrangements drift. Revisit every six months.

If the answers are mostly no, engage the person as an employee, either permanently or on a fixed-term agreement with a genuine reason. If you need the flexibility without the risk, talk to us about a contract placement.