Employers can find it difficult to choose employees vs independent contractors.
The rights and responsibilities for employees and independent contractors tend to differ drastically. As a business, it is important to know if your worker is an employee or independent contractor as employment law applies to employees whereas commercial law applies to contractors.
Employees vs Independent Contractors
Employee
The definition of an employee is any person of any age employed by an employer to do any work for hire or reward under a contract of service. An employee is covered by an employment agreement, which should outline the basic entitlements available to the employee. The employee will normally be advised in the agreement of their pay, holiday entitlements, arrangements for sick leave, among other aspects.
In respect of record keeping obligations, it is also important to note that employers are required to maintain employee records. Employee records need to be accurate and kept for a period of 6 years, whereas employers do not need to keep records for independent contractors.
Independent Contractor
Compared to an employee, an independent contractor is often self-employed and will be engaged specifically for reasons outlined in a contract. The contract, sometimes referred to as an independent contractor agreement, is different to an employment agreement and will therefore not outline the same information, such as leave entitlements and arrangements for holidays.
Regardless of the worker being an employee or an independent contractor, it is important to note that employers have health and safety obligations to both parties and must comply with the Human Rights Act when dealing with contractors and employees.
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 Employment Relations Act 2000.
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 Employment Relations Authority or the Court is required to determine the true nature of the relationship between a business and a worker, irrespective of what the worker is called or labelled in an agreement.
Typically, they will apply the leading case law which currently helps employers distinguish between an employee and a contractor. These tests 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?
What are some of the risks of misclassification of an employee as an independent contractor?
Incorrectly classifying employees as independent contractors can lead to serious underpayments or missing basic employment entitlements and the Business may have to pay:
- Penalties
- Under-payment of wages
- Leave entitlements
- Unpaid tax and KiwiSaver
A Worker may claim
- Employment ended incorrectly – unjustified dismissal
- Employer failed to provide minimum entitlements
Peninsula works with businesses and employers supporting them with tailored contracts, policies and documents to safeguard their staff and workplace. Call us on 0800 234 036 today to learn how we can help you.
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