Contractor vs employee: what’s the difference

Date: 3rd January 2017

Should I hire an employee or a contractor? What’s the difference? This is a question that often get asked by our clients, especially those involved in to the construction and building industry and the professional services industry.

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It’s important to understand how employees and contractors differ because it affects your legal obligations. The main thing to keep in mind is that employees work for you, while contractors work for themselves.

Differences between employee and contractor

The main differences include:

  • Employees have employment agreements with your business, while contractors are free to work for anyone.
  • You pay PAYE and KiwiSaver on behalf of your employees, while contractors make their own payments.
  • Employees will work where and when you tell them to. Contractors can decide how they work and even employ other people to help them.
  • Employees generally use their employer’s equipment, while contractors use their own.
  • Employees are required to work set weekly or monthly hours and may get paid overtime for working extra. Contractors work to agreed timeframes.

Employment laws

Most employment laws do not cover contractors in the same way as employees. Unlike employees, contractors:

  • don’t get annual leave or sick leave
  • can’t bring personal grievances
  • pay their own tax.

Also, your business does not:

  • hold contractor’s records — but it does for employees
  • give contractors employment agreements.

Be wary of getting it wrong

A contracting arrangement may be considered a sham if the Employment Relations Authority considers that the has employer deliberately disguised it an employment relationship. This is usually done so the employer can avoid their responsibility for employee entitlements. In this case the employer will still have to give the ‘employee’ their employment entitlements and the ‘employer’ may also receive penalties against them.

More information

Find out more about the difference between employees and contractors at the Employment NZ website or feel free to get in contact with us for a chat.

More resources for employers

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Important law changes from April 2016

Tips on being a flexible boss & how it helps your business

Inland Revenue targeting business record keeping

5 law changes that business owners should know about

‘Cashies’ in construction industry targeted by IRD

How to Mondayise & Tuesdayise public holidays this holiday season 2016/17



Posted in: Alexandra, Latest News, Queenstown, Wanaka