What's the Difference Between Contractors and Employees?

Employment Contracts

How the Gig Economy is Changing Hiring Trends

Are you hiring more contractors in your business than ever before? Chances are, you’re among the many small businesses in New Zealand getting new workers on a consistent basis through the booming ‘Gig Economy’ – but it’s not without a price. With this innovation in hiring, from the previous standard employee system to the now more abundant contingency workers, comes a host of concerns for whether your business is operating in line with the law. What is the ‘Gig Economy?’ The gig economy refers to the growing number of workers abandoning traditional 9 to 5 employment in favour of working independently on a task-by-task basis for various employers. Workers are expressing an increasing demand for flexible and autonomous work, prompting many to explore opportunities to work on their own terms, engaging in freelancing or working as independent contractors. Others, unable to secure employment in the challenging labour market, have turned to this type of work out of necessity. Some of the examples of 'gig work' are food and grocery delivery, transport, creative professionals, and courier work. Freelancers are more likely to undertake work for different clients concurrently on an adhoc basis and are paid a fixed price for projects. Others, unable to secure employment in the challenging labour market, have turned to freelancing out of necessity. For SMEs who have traditionally lacked the resources to recruit and retain the best talent, this increased access to on-demand workers is an attractive one. To capitalise on the benefits of the addition of freelancers into the workforce, companies will require new tools and approaches. However, issues may arise when there is less protection for these workers, and when the definition of who is a contractor and who is an employee becomes murky. Various questions arise regarding how to manage and engage temporary workers effectively: How to sift through the ever-growing talent pool of freelancers to locate the best talent? How can companies ensure that freelancers actually have the expertise required? How to ensure the right talent is working on the right tasks at the right time? How much compensation should freelancers receive? How to ensure freelancers are well-versed with company culture, mission, values, history, challenges and procedures? How to strike a balance of protecting company security systems and granting enough access to freelancers to perform their duties? How much training and induction should be provided to a freelancer? How can companies ensure coherence amongst staff with geographically scattered workers? Who will have the ultimate decision-making authority, and how will command chains be structured? How to mitigate legal risks and protect company IP? Key Trends in the Gig Economy Small business owners have a varied range of work arrangements There is a lack of clarity around regulations, contracts, and policies Lack of financial stability for gig workers and employees Professionals are now having to rely more on background checks, continuous monitoring and other screening practices to ensure that the gig workforce that is booming in their business meets legality and safety standards. HR professionals can leverage background checks and various screening methods to improve recruitment confidence in contingency worker hiring. What is ‘Sham Contracting’? A sham contracting arrangement occurs where an employer attempts to disguise an employment relationship as an independent contractor arrangement. The most common reason for doing this is to avoid paying employee entitlements. Sham contracts can actually be unintentional, with the employer misunderstanding the arrangement and generally not understanding the policies and laws behind hiring. It can also be an intentional action, with the employer avoiding paying minimum entitlements such as KiwiSaver, holiday pay and other leave, and having to follow a fair and reasonable process prior to termination. It’s very possible for a company to accidentally find themselves in a sham contracting arrangement. A contractor that has been engaged consistently to deliver services could actually be defined as an employee in a legal sense. This means that for companies who hire contractors on a regular basis, it’s essential to have confidence in where you actually stand and how you are faring against legal standards. Employee vs Independent Contractor An employee is a person who is performing work for hire or reward e.g. wages/salary. This is called a ‘contract of service.’ An independent contractor, in contrast, is usually engaged for a specific project or task for a set fee. The responsibilities and rights of these two forms of workers are very different by law. If you’re hiring a contractor, as a business it is your responsibility to know the difference and to be sure that you are employing your workers in line with how they legally need to be characterised. Distinguishing factors for employees versus individual contractors: An employee performs work under the direction and control of their employer on an ongoing basis, whereas a contractor has a high level of control in how the work is done. An employee generally works standard or set hours (note: a casual employee’s hours may vary from week to week). An independent contractor decides what hours to work to complete the specific task. An employee has on ongoing work brief, with specific goals and actions to achieve, whereas a contractor is engaged in a specific task or project An employee bears no risk as part of their employment – that is the employer’s responsibility. A contractor bears the risk of making profits/losses on the projects that they deliver (i.e. Contractors generally have their own insurance policy). What is a Specified Contractor? With effect from 21 February 2026, “Specified Contractors” are excluded from the definition of an Employee as defined in the Act. To determine if someone is a Specified Contractor, a gateway test is applicable. The intention of the gateway test is to provide clearer certainty for businesses to ensure that they are engaging with “genuine” contractors. If the contractor meets all the requirements of the gateway test, then they are automatically deemed a specified contractor. To meet the test, they will have to satisfy all of the following points: have a written agreement that details that they are an Independent Contractor (or not an employee); and they are not restricted from performing work for another party they are not required to work certain times or days or for a minimum period; or they are allowed to subcontract without the subcontractor having to be vetted (unless required by law) the business cannot terminate the arrangement if the contractor does not accept an additional task. the contractor had a reasonable opportunity to seek independent advice before entering into the arrangement. What if a Worker does not Pass the Gateway Test? If a worker does not pass the gateway test, then the Authority or Courts will look at the “real nature of the relationship.” This means that they will look at the relationship and the actions of both parties despite what’s written in the contract. So why is this important? If the true nature of the relationship skews towards an employment relationship, then this can lead to a hefty back-pay and legal risks. The business may be held liable for extra costs including back payment of wages, leave entitlements and it also means that a personal grievance could be raised. If the arrangement does not pass the gateway test, then to determine the real nature of the relationship, the courts will typically apply the leading tests which help distinguish between an employee and a contractor. These are as follows: Intention test – for example, what was the intention of the parties? Was the contract offered on a “take it or leave it” basis or were the parties able to negotiate the terms? Control vs independence test – for example, how much autonomy or control does the worker have? Can they regulate how and when they perform the work? Integration test – for example, how integrated is the worker into the business’ operation? Do they have a company email address or wear the company uniform? Fundamental/economic reality test - for example, Is the worker paid a set wage, or do they instead invoice for their time? Is the worker independently registered as their own business? Do they have other clients? Ultimately, when the gateway test has not been passed, the difference between a contractor and an employee is not clear cut and is determined on a case-by-case basis. If you’re incorrectly categorised a worker as a contractor, you could be at risk of a sham contracting arrangement. What You Can Do to Protect Your Business You need to have a clear understanding of your working relationship to determine whether a person you are engaging in work with is an employee or an independent contractor. If possible, your agreements should line up with the provisions of the gateway test. Safeguard Your Business With Peninsula Small business owners are juggling a lot of responsibilities and duties. On top of handling their business, they need to have airtight employment contracts for their workforce. Peninsula has years of experience in creating tailored contracts and documents for Kiwi businesses and companies. Talk to our team today to get employment relations support and advice. This article is for general information purposes only and does not constitute as business or legal advice and should not be relied upon as such. It does not take into consideration your specific business, industry or circumstances. You should seek legal or other professional advice regarding matters as they relate to you or your business. To the maximum extent permitted by law, Peninsula Group disclaim all liability for any errors or omissions contained in this information or any failure to update or correct this information. It is your responsibility to assess and verify the accuracy, completeness, and reliability of the information in this article.

Employment Contracts

Contractor vs Employee

Contractors are heavily relied upon by many New Zealand businesses. Sometimes, however, understanding the difference between a contractor and an employee can be a little confusing. There have been notable concerns throughout workplaces when it comes to defining contractors, mainly due to the true nature of the employment relationship being hard to classify. In addition, the relationship between employer and contractor can change over time and if the contractual arrangements are not updated, you could be in breach of the Employment Relations Act, resulting in possible penalties and back payment of unpaid entitlements. Sadly, the associated penalties for such an incident can be significant, impacting both the employer personally and the business. It is important for all employers to know that regardless of the differences between employees and contractors, the Health and Safety at Work Act 2015 applies to all classifications of workers. What is a contractor? A contractor is defined as being engaged under a contract for services, commonly called an independent contractor agreement, as opposed to an employee who works under a contract of service. Contractors are also defined as self-employed, invoicing the principal (or employer) for their services. An important difference to also note is that generally speaking, a contractor must pay their own tax and ACC levies. Contractors do not fall under most general employment legislation such as the Employment Relations Act and the Holidays Act 2003, meaning they are not entitled to minimum wage or other employment entitlements, such as paid statutory holidays or sick leave. In addition, there are no requirements for employers to keep time and wage records for contractors. It is important to note that a contractor can raise the claim that they are in fact an employee, and ask the Employment Relations Authority to investigate, and make a determination on the status of the relationship. If the Employment Relations Authority finds that an employer has engaged someone as a contractor, whereas the real nature of the relationship is that of employment, then the employer may be held liable for extra costs including: the back payment of wages, holiday and other leave entitlements compensation if the engagement was terminated or changed without a process, and fines or penalties How to identify an employee An employee is a person who falls under an employment agreement and works in return for a wage or salary. All employees are entitled to the minimum employment rights under employment legislation, which includes pay (minimum wage or above) and access to holidays and other types of leave. Employers must ensure all employees have a compliant written employment agreement in place and that they keep a record of this. There are other record keeping obligations of the employer, such as hours of work and all leave taken. Employees also have the right to raise personal grievances for unjustified dismissal and unjustified disadvantage. Specified contractor Test / Gateway Test In February 2026, a test for Specified Contractors was introduced into law. Contractors who meet specific criteria are automatically deemed genuine contractors, preventing retrospective reclassification as an employee. A worker is classified as a specified contractor when: there is a written agreement that specifies that the worker is an Independent Contractor (or not an employee); and they are not restricted from performing work for another party the worker is: not required to work certain times or days or for a minimum period; or allowed to subcontract any work the business cannot terminate the arrangement if the worker does not accept an additional task the worker had a reasonable opportunity to seek independent advice before entering into the arrangement. If the contractor meets all the requirements of the gateway test, then they are automatically deemed a contractor! What If the Worker Does Not Pass the Specified Contractor Test / Gateway Test? If the worker does not meet the gateway criteria, then the Authority or the Courts will look at the true nature of the relationship, irrespective of what the worker has been classified as in a contract. Typically, they will apply the leading tests which help distinguish between an employee and a contractor when the gateway test is not passed. These are as follows: Intention test – for example, what was the intention of the parties? Was the contract offered on a “take it or leave it” basis or were the parties able to negotiate the terms? Control vs independence test – for example, how much autonomy or control does the worker have? Can they regulate how and when they perform the work? Integration test – for example, how integrated is the worker into the business’ operation? Do they have a company email address or wear the company uniform? Fundamental/economic reality test - for example, Is the worker paid a set wage, or do they instead invoice for their time? Is the worker independently registered as their own business? Do they have other clients? Employers who answer yes to any of the following questions, and do not consider the person an employee but a contractor, should consider reevaluating the nature of the relationship. Is the individual required to wear a uniform with your branding on it? Does the individual have limited control over how, where and when they conduct their work? Does the individual have set hours of work? Is the individual subject to supervision and direction? Does the individual use equipment supplied to them? Are weekly hours and times of work set by you, the employer? Does the individual receive the differing types of leave such as holiday leave? Does the individual get reimbursed for work related expenses such as petrol and travel? Are they engaged on a continual basis? Are they working for only one entity? Empower Your Business Today Peninsula is here to help you navigate the potentially confusing definitions associated with employment. Our advice line is available day or night, so feel free to contact us whenever engaging new staff to ensure you are meeting your obligations. This article is for general information purposes only and does not constitute as business or legal advice and should not be relied upon as such. It does not take into consideration your specific business, industry or circumstances. You should seek legal or other professional advice regarding matters as they relate to you or your business. To the maximum extent permitted by law, Peninsula Group disclaim all liability for any errors or omissions contained in this information or any failure to update or correct this information. It is your responsibility to assess and verify the accuracy, completeness, and reliability of the information in this article.

Employment Contracts

Employment Contracts: Written vs Verbal

Employment Contracts Every time an employee enters into a work agreement, a contract is set in place. Even if you haven’t signed anything yourself, it might surprise you to know that a discussion and a shake of the hand could be as legally binding as a signed document. Whether it has been written or verbalised, any contract needs to be based on the following criteria: Offer Acceptance of the offer Agreement of all terms Intention to be legally bound A transaction – something is exchanged (eg, services for money) So, what are the key differences between verbal and written contracts, and which should you be using in your business? Verbal Agreements Also known as Handshake Contracts, verbal agreements are often used by small business owners because they are convenient. Many small business owners want their staff to trust them, and as such, they feel that a documented contract is unnecessary (or too formal). What many small business owners don’t realise is that these verbal contracts are legally binding and if a dispute arises, it may cause a plethora of legal issues. Written Contracts In New Zealand it is a legal requirement that every employee is covered by a collective agreement or has a written individual employment agreement. These documents ensure that employees know what to expect, what their obligations are, and protects both the employer and employee. If a dispute does arise then both employer and employee can refer to the applicable agreement Written contracts frame the relationship between employer and employee which help to keep the framework of the business intact and shapes how the employee fits into the business itself. There are certain requirements that all employment agreements must contain, including: The employer and employee’s names Position / role Place of work Any guaranteed hours of work Type of Pay Rate of pay Public Holidays Restructuring Resolving employment relationship problems Employment agreements can also set out additional rights and obligations of the parties over and above the minimum requirements. Examples of such optional clauses are those pertaining to intellectual property and copyright, bonus schemes and additional benefits such as the use of a company phone or motor vehicle. If an employer wishes to change an aspect of an employee’s employment agreement, for example, an employee’s hours of work, the employer will need to have a genuine business reason and go through a consultation process with the employee. What should small business owners do? Verbal contracts might be easier and less time consuming, but they don’t come without problems and they can be extremely difficult to prove. They also do not meet your legal record keeping obligations as an employer.  If you do not have a written contract in place, not only will you be liable for a penalty, but you will be required to provide evidence to support your version of the truth. You not only need to prove that the agreement exists, but also the actual terms agreed to. In the case of a verbal agreement, this could include any emails or text messages that have been exchanged, pay slips, and so on. In the case of a dispute, failure to have a signed written agreement in place can make proceedings in the Authority or Court complex and messy. Having it all on paper provides proof of the agreement if a problem should ever arise. You can easily outline the terms of the employment and any expectations of the employee relationship. Ways a written contract can help small business owners A written contract is one of the most proactive steps Kiwi business owners can take to ensure their staff know what is expected of them. Without a doubt, during the course of employment, there will be a question of the hours to work, agreed allowances or wages. Written contracts provide all of this from the outset so there is no confusion. Legally, it allows business owners a safety net, providing them a point of reference that they can refer back to if they ever need to double check the specifics of an agreement. This means they can easily resolve any queries or disagreements about rights, duties and promises made by either party. Essentially, a written agreement allows a small business owner to protect themselves and their business. Get support with Peninsula Peninsula has worked with Kiwi business owners, supporting them in employment relations and workplace health and safety. Our team provides help and answers to matters of contracts, employment, and employee management. If you’re feeling confused and want some advice, get in touch with the Peninsula team on 0800 675 700. This article is for general information purposes only and does not constitute as business or legal advice and should not be relied upon as such. It does not take into consideration your specific business, industry or circumstances. You should seek legal or other professional advice regarding matters as they relate to you or your business. To the maximum extent permitted by law, Peninsula Group disclaim all liability for any errors or omissions contained in this information or any failure to update or correct this information. It is your responsibility to assess and verify the accuracy, completeness, and reliability of the information in this article.

Employment Contracts

Different Types of Employment Agreements

Managing staff is complex, but getting it right in the first place is crucial. Ensuring employees start their role on the correct employment agreement is one of the most straightforward ways to ensure they are receiving minimum requirements and being utilised most effectively in the business. Figuring out what kind of support and employee you need is crucial. Different types of employees need different employment agreements. Key things to remember In New Zealand, every employee must have a written employment agreement. Employers must have staff on the right type of employment agreement from the start. The employment agreement helps you manage an employee's work, hours, terms and conditions. Think carefully about what work needs to be done, how often, and how long. Depending on these factors, you can pick a permanent, fixed-term, or casual employee. The agreement should be updated based on any changes or if the relationship changes- for example, a fixed-term employee accepts a permanent position, then the employment agreement needs to be updated. Types of agreements You can agree an individual employment agreement with the employee, or if they're a union member they'll be covered by any relevant collective agreement. There are also employment agreements based on the type of employee you choose to hire- permanent, fixed-term, casual. Collective employment agreement A collective employment agreement is between an employer and a registered union that covers employees, who are members of the union, within the employer's workplace. If your employee is a member of a union, they will be employed under a collective employment contract, if there is one. The union will negotiate the terms of employment like pay, leave, and other benefits. Individual employment agreement Individual employment agreements are negotiated between an employer and an employee and define the terms and conditions of the employment. Things like 4 weeks' annual holidays do not need to be in the employment agreement, but the employer must still provide them by law. Permanent employment agreement Permanent employees work full-time or part-time and have an ongoing employment which does not have an end date. The employment relationship will only end when you or the employee terminate it, either by dismissal or resignation. A person can have permanent full-time employment or permanent part-time employment. Every permanent employee must have an employment agreement. Fixed-term employment agreement Fixed-term employees are employees who work with you for a specific period of time (e.g. seasonal work) or are employees who are hired for a big project. Fixed-term employees are also hired to replace employees that might be away, e.g. parental leave. There must be a genuine reason based on reasonable grounds for fixed-term employment. Fixed-term employees have temporary employment which ends on a specific date. Fixed-term employment agreement must say how will the employment end and the reason for ending the employment that way. Fixed-term employees have the same employment rights and responsibilities as permanent employees for the time they're employed. Casual employment agreement Casual employees work when it suits them and can turn down work. They do not have a regular pattern of work and do not expect ongoing employment. Casual employees are great when you need an extra set of hands. They can work at short notice, e.g. to cover staff sick days. You do not have offer consistent work and can end the employment without a formal dismissal process. Casual employees must have an employment agreement that describes the arrangement. It should list out the specifics: the amount of work will vary there is no guarantee of work on a specific day each time the employee accepts an offer of work it's considered a new period of employment terms of agreement apply to each new period of employment the way the employee will be notified of available work that the employee does not have to accept work The list above is not an exhaustive description of agreements and employees. There are many other types of working relationships-independent contractors, apprentices, trainees, and interns. Peninsula works with business owners and employers in New Zealand, ensuring they get the basics of employment relations right. Our services are tailored for all types of businesses and provide the essential information you need to create accurate employment agreements. Call our advice line on 0800215031 to learn how we can help you.

What's the Difference Between Independent Contractors and Employees?

What is the Definition of an Employee?

Independent Contractor

What is a Specified Contractor?

What if a Worker does not Pass the Gateway Test?

What if employers get it wrong?

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Related Blog Posts

How the Gig Economy is Changing Hiring Trends

Contractor vs Employee

Employment Contracts: Written vs Verbal

Different Types of Employment Agreements

Do you have any questions regarding Employment Contracts?