In some industries, it makes sense to utilise independent contractors instead of permanent employees. For small businesses that tend to outsource work or hire specialists, hiring an independent contractor is a good alternative. However, the arrangement must be genuine, and businesses must ensure that they are not simply an employee who has been mislabelled or misrepresented.
Contractor v Employee
Contractors are not protected by the Employment Relations Act or any other employment legislation. This means that they cannot access annual leave, sick leave, or holiday pay. They also cannot raise any personal grievances. Contractors will also pay their taxes and other government levies, while an employer must make these payments on behalf of an employee.
Unlike employees, a business need not maintain contractor records to the same extent as payroll and other data. Contractors control their working hours, how work is done, and how they use their tools. A contractor is less likely to be integrated into the team, for example, they might not be invited to company events, and they should not be required to wear company uniforms.
Benefits of engaging a contractor:
Access to special skills - Independent contractors bring highly sought-after specialist skills that the business may need for a project.
Adaptability - Independent contractors are hired for a specific time, which means they must pick skills up quickly. They are adaptable, fluid, and quick learners.
Less administrative work - Independent contractors bring their own equipment, pay their taxes, and manage their timesheets and workload.
New outlook - When the business is working on a big project, having an outsider’s perspective may help the business and the team. An independent contractor can bring that new outlook and energise the team and boost productivity.
Ensuring the Worker is a Genuine Contractor
If there is an intention to engage with contractors, businesses should follow the guidelines below to ensure the worker either falls into the category of a specified contractor or is a genuine contractor. It is important to remember that there may be many reasons why a business may choose to engage an individual as a contractor instead of an employee. However, a willingness by both parties to engage in a contractor relationship is not sufficient for the arrangement to be legal.
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 (the Act).
The Act sets a gateway test to establish if a worker is a Specified Contractor.
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 Meet the Criteria of the Gateway Test?
If a worker does not meet the criteria of the gateway test, then the Employment Relations Authority or the Court is required to determine the real nature of the relationship between a business and a worker, irrespective of whether they have signed an Independent Contractor Agreement.
Intention Test
This test examines how the parties originally intended to shape the relationship. The written agreement provides a good indication of whether it was intended to be an employment relationship or a contract of services at the outset.
Control v Independence test
The level of control the individual has over their work can be an indicator of the employment relationship. A contractor can choose more freely where they work, when they work or the tools used, while an employee will have more clearly controlled work arrangements determined by their employer.
Integration test
A worker will likely be considered an employee if they are fundamental to the business regularly. A contractor will typically complete tasks that are required as a one-off situation.
Fundamental / Economic Reality Test
This is one of the more definitive tests which examines the total situation of the working relationship. The test will ultimately look at whether the individual is in business for their own account or paid as an employee.
Independent Contractor Agreement
Sometimes referred to as an independent contractor, a contractor will be engaged by a principal (often the business owner) to complete certain tasks or perform services.
A contractor and the principal will often have a written agreement called an Independent Contractor Agreement. This agreement will outline payment, duties, and other important factors for the relationship such as whether they are a Specified Contractor.
The period of contracting work can vary between days or months. The agreements usually are for a fixed term or renewable (can be continued longer if both parties agree).
The payment of contractors is done through invoices, and contractors are responsible for paying their own tax and Accident Compensation Corporation (ACC) levies.
Independent Contractors and the Health and Safety at Work Act 2015
Under the Health and Safety at Work Act 2015 (the Act), independent contractors are treated the same as workers. This means they have the same obligations, and rights to a healthy and safe workplace.
Contractors must take reasonable care of their health and safety in the workplace and ensure their actions do not place any other individual at risk, as well as complying with any reasonable instruction given by the principal.
The Act also outlines that businesses must ensure their health and safety, and the health and safety of those impacted by the tasks being completed by the contractor.
Small business owners engaging independent contractors should ensure that before any work is completed, the same work health and safety inductions undertaken for employees are completed for the contractors. This ensures all parties are aware of what is required from them, and that safe practices are being practised across the workplace.
Only the Health and Safety laws, Privacy Act 2020and the Human Rights Act 1993 apply to employees and contractors.
For free initial advice and support on independent contractors in the workplace, contact Peninsula.
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.