Employee Versus Contractor signsIf you are planning on taking on a new staff member you might have the option of choosing between hiring an employee and hiring a contractor. It’s important to understand the differences between these two options because your obligations as a business owner will be substantially different.

Essentially, an employee works for you, while a contractor works for themselves. To help decide what the relationship is, there are some legal tests the courts have developed:

  • Intention test – what each party intended the relationship to be
  • Control versus independence test – generally employers have a greater degree of control over employees than contractors
  • Integration test – the extent to which the worker’s contribution is fundamental to the business
  • Fundamental/economic reality test – examination of the full circumstances of the work relationship to assess its economic reality

If you hire someone as a contractor when their working relationship is actually that of an employee, there could be major consequences. For example, unpaid holidays and leave, PAYE, IRD penalties, Employment Relations Authority penalties, and potentially being banned from bringing in workers from overseas. Your business’ reputation can also be damaged from the negative publicity.

Employment.govt.nz has comprehensive resources to help you decide on the right working relationship, including simplified legal tests, employees’ rights, and employer responsibilities.