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.