Note: This article is written in September 2020 - watch out for changes being considered by the current Labour Government which, if enacted, will give Independent Contractors more ‘employment-related’ rights, which may make using them less attractive.
So, who cares about the difference between employees and Independent Contractors?
Well, here’s some who do:
Employment: Employment Relations Authority (‘ERA’)
Employment Court (‘EC’)
Employment Lawyers and Advocates
Tax: Inland Revenue Department
Financial: Banks (for mortgage eligibility)
Insurance: For public liability cover and professional indemnity
All of them have an interest in whether or not an individual is an employee or an
So what’s the difference between the two?
The protections and benefits afforded by employment law, including (for example):
1. Four weeks paid annual leave (minimum)
2. Public Holidays
3. Sick leave
4. Bereavement leave
5. A fair disciplinary process
6. Training & Development
7. A degree of certainty about their employment
8. Regularity of work, meaning regularity of income
9. Access to the employment law system (mediation, ERA, EC)
10. Redundancy process provisions and (for some) redundancy compensation
These benefits apply to all Full-time, Part-time, or Fixed Term employees (‘casuals’ only get
some of them)
Independent Contractors get:
1. None of the above, which is why business owners are tempted to use them.
2. Independence, which for many individuals means ‘freedom’.
3. Choice, of when they work, and who for.
The employment law system and Inland Revenue have together developed a series of ‘tests’
to be applied in determining who is an employee, and who is an Independent Contractor.
The tests aren’t absolute – the relationship might fail one test but be correct for the others.
It’s a ‘weighting’ game.
1. Intention test:
What did the two Parties freely agree to at the beginning, what did they want the
relationship to be? What documents exist that prove that both Parties understood clearly
what the arrangement was to be and clearly expressed a wish that this be an Independent
Contractor relationship? I use a ‘Memorandum of Understanding’ that addresses all five of
the ‘tests’. Be aware that the ERA/EC/IRD will overlook documentary evidence in favour of
the ‘reality’ of the situation. So just because you both agree, doesn’t mean the tests are
2. Control test:
How much ‘control’ does the business owner have over the work the individual does? Does
the owner direct when and how things are to be done?
If there is a high element of control, this indicates ‘employee’.
3. Independence test:
To what degree is the individual free to choose how they want to do the job – do they
determine the methods and processes without much involvement from the owner? Do they
just arrive at work and get on with it? Can they decide not to work today? Can they send
another person along to do the work for them? Can they leave one business at 2pm and go
to another business for the rest of the day? A high level of independence indicates
4. Fundamentals test:
Is the individual clearly in business for themselves – do they advertise their services, do they
have other businesses that they provide service to? Do they get income from several
businesses (i.e. a contractor) or just one (an employee). Do they have an investment in
significant capital equipment – like a logging truck – or is their only tool a lap-top? In the
event of a mistake requiring re-work, do they have to fix it at their cost (i.e. contractor)?
Are they performing a set of tasks commonly done by employees in the business? If so, why
is this individual a Contractor?
5. Integration test:
How does this individual ‘fit’ into the business? ‘tightly integrated’ means that they are
doing work that is highly important, or a key role, where their sudden absence would be a
problem. If they decided to stop providing their services, what would happen? If the
business came to a halt, then they are tightly integrated and more likely an employee.
So what happens if you get it wrong?
Well, both parties may suffer from a mistake:
In the event of trouble, the business owner may suddenly find that either the EC, the ERA or
the IRD have determined them to be an ‘employer’ and the Independent Contractor to be
an ‘employee’. This is where the ‘fun’ starts. For example:
An Independent Contractor you decided to just stop using, goes to a lawyer who puts up a
case that they were really an employee; this means they were eligible for many of the
benefits in the above list, including annual leave (calculated for however long they were
with you) and a fair disciplinary or performance management process – so you’ve now got a
Personal Grievance on your hands for ‘unjustified dismissal’ which might cost you a lot of
money in compensation for ‘hurt and humiliation’ and arrears of ‘wages’. The IRD also have
an interest in that PAYE should have been paid (for however long etc).
The complainant doesn’t have it all their way either – no doubt the Independent Contractor
has been claiming GST, and operating costs and expenses against income tax. That all has to be reversed. It really is a very messy business, and an expensive one for the business owner.
OK, so what does all this mean?
Just because someone says they are an Independent Contractor does not mean they are
Just because you sign documents together saying they are an Independent Contractor does
not mean the relationship is that of an Independent Contractor, if the reality of the situation
fails the tests.
A person who starts as an Independent Contractor may, in reality and over time, become an
employee if their situation changes.
Our employment law system in NZ – and Unions - want people to be employed, and in
‘proper jobs’, preferably full-time and permanent, with all the protection for the worker
that goes along with that. Left-leaning political parties influence law to achieve that.
Independent Contractors have very little protection in employment law. However, they are
free to work wherever, whenever and for whoever they like. For many this is the main
attraction, and they either don’t want or don’t need the protection of employment.
The ‘elephant in the room’ is the suspicion that business owners want to use Independent
Contractors so that they can avoid the responsibilities of being an employer. Unions see this
as exploitation of the worker. There have been test cases over the years against Courier
companies (for example), because although the drivers are supposedly Independent
Contractors and have to buy their own van, they then have to sign-write their vehicle in the
company’s colours and logo, work the hours the company directs, wear the company’s
branded uniform, are given specific geographical areas to operate in, and are not allowed to
carry parcels for any other company. How many ‘test fails’ can you see?
In 2018, Southern Taxis (Christchurch) had to pay $97,753.05 in arrears to its drivers who it
had treated as Independent Contractors when in fact they were employees.
Earlier this year (May 2020) Parcel Express fell foul of Chief Judge Christina Inglis who
determined that one of their ‘Independent Contractors’ was in fact an employee. Although
her judgment was limited to just that one person (not all Parcel Express drivers), it is
considered a landmark case and has probably opened the door for other actions.
LSG SkyChefs were using a labour hire company which in turn used workers who they
considered Independent Contractors. It went right up to the Court of Appeal, who
determined that the contractors were in fact employees of LSG SkyChefs. For those
businesses using labour hire companies, watch out for test cases of the new Triangular
In the UK they have already moved to create a classification of ‘Dependent Contractor’
which gives those individuals almost all of the rights and entitlements of employees. Our
Labour Government has recently expressed interest in doing something similar.
So. If you’re thinking of engaging an Independent Contractor in your business, rather than
an employee, have a good think about why you are doing that. If it’s for flexibility, or short
term, or intermittent use, or for a specific project, then go ahead.
It’s important that you ‘get it right’ because the consequences of a mistake can be very
expensive, time consuming and stressful!
Article supplied by Steve Punter; owner of The People Effect Ltd based in Taupo, operating locally and around NZ and the Pacific Islands. He’s a Human Resources and Employment Relations specialist with 30 years in the profession. Check out www.thepeopleeffect.co.nz
Steve Punter is a Human Resources and Employment Relations practitioner, Advocate and educator, not a lawyer. All the above is provided for educational purposes and is not intended as legal advice. For a specific legal opinion, consult an employment lawyer.
Other sources for your own reading:
Employment Relations Act 2000 (section 6- Meaning of Employee)