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Contractor vs Employee

Employment Contracts

2 Aug 2016 (Last updated 26 Feb 2026)

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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.

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