The application of the Employment Relations Act 2000 and different tax treatment are key reasons it is important to correctly establish whether a person is an employee or an independent contractor. The following distinctions arise:

  1. Employers are required to deduct PAYE taxes for employees, but not independent contractors. Independent contractors must register for GST if their income exceeds $60,000 and must pay accident insurance levies. In the case of a work injury, an employee will receive 80% of earnings lost in the first week from their employer, whereas ACC will pay an independent contractor for the second and subsequent weeks.
  2. Independent contractors are not entitled to holiday pay, sick leave, benefits of the Minimum Wage Act and parental leave legislation.
  3. Personal grievance procedures may only be used by employees who are subject to a contract of service. Employees can seek remedies through the Employment Relations Authority or Employment Court. Disputes between a contractor and hirer must be resolved as purely contractual disputes through the Civil Courts.
  4. Employment law creates a relationship of trust and confidence between the employer and employee. Implied in all employment agreements are duties of personal service, obedience, fidelity, confidence, trust and fairness. Generally, these are absent from the dealings between a contractor and hirer.
  5. As a general rule an employer is vicariously liable for the acts of an employee, but may not be for the acts of an independent contractor.

Employment status depends on whether a worker's employment agreement is a contract of service or a contract for service. Under the Employment Relations Act 2000 a written employment agreement is not conclusive in answering this question, although it can show the intention of the parties. If challenged, the Employment Relations Authority will look at the real nature of the relationship and apply a number of tests. These include the control, integration, independence, intention and economic reality tests:

  • Control – this test determines who controls how and when the work is done, has a right to suspend or dismiss, and who is responsible for quality.
  • Integration – this test determines whether the type of work, or the way it is done is the same as the work performed by other staff who are employees, and whether the work is an integrated part of the employer's business.
  • Independence – this test determines if the worker supplies all the necessary tools, works from independent premises, and is free to work for other people as well.
  • Intention – this test considers what the parties intended: whether payment for work is made, whether self-employed person previously carried out the same activity as the worker or vice versa, and whether the worker is being treated as self-employed.
  • Economic reality – this test considers whether the type or nature of the business justifies employing a contractor.

As discussed above, there are numerous indicators which will suggest whether a worker is an employee or independent contractor. To understand the difference between an employee and independent contractor requires an assessment of the whole of the relationship and its context. In a leading case (Three Foot Six Ltd v Bryson [2004] CA246/03) the Court of Appeal considered industry practice was an external reality that was relevant to determining the real nature of the relationship. What employers really need to be aware of is that the courts will look beyond the labels.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.