A contractor usually charges a fee for their services, whereas an employee is paid a salary or a wage. For an employee, the employer pays PAYE tax and ACC on the employee's behalf, and the employee is paid net wages or salary. A contractor generally pays their own tax directly to the IR.
IRD has certain criteria that defines a contractor. If your employees meet the criteria then it’s fine to pay them as contractors rather than employees. See Inland Revenue Department’s website for confirmation of what constitutes a contractor.
Employee versus Contractor
Don’t make the mistake of paying someone as a contractor if they really fall under the category of employee. This can be a trap that can cause you serious problems later.
They are probably an employee if:
- The intention of the employer and employee is to form an employment relationship, and this is shown in any written agreement or correspondence and/or by the behaviour of the parties to it
- The employer or their agent controls the hours worked
- The employer or their agent has the power to hire and fire
- The employer makes the profit or loss from the enterprise
- The employer deducts ACC premiums and PAYE tax on behalf of the employee
- The employer supplies materials for the work
- The employer owns or leases the equipment needed
- The employee is bound to one employer at a time and is expected not to compete or offer his or her skills to competitors of the employer
They are probably a contractor if:
- The intention of the parties to the contract is not to form an employment relationship, and the actual nature of the relationship reflects this
- The contractor controls how and when the job is done
- Payment is made in a lump sum at the end of a job, or in instalments as progress is made on the job
- The contractor can choose who does the job and can hire other people without approval from the other party
- The contractor pays any tax, ACC and insurance directly
- The contractor can make a profit or suffer a loss directly
- The contractor supplies equipment and materials
- The contractor is free to accept similar work from a number of sources at the same time.
Still unsure if they’re an employee or contractor? Sometimes it’s still not entirely clear. But you can get into trouble if:
- Someone is taken on as a self-employed contractor, but they think they’re really an employee; or, more typically
- During the course of either an investigation by a Labour Inspector, in the course of mediation or before the Employment Relations Authority, where there is an action, say to recover arrears of wages or holiday pay, the actual nature of the relationship sometimes comes into question.