Most people are aware that there is a significant difference between hiring an employee and a contractor. But is someone a contractor just because they’ve signed a contract for services rather than an employment agreement? Not necessarily.

Hiring a contractor sounds simple enough, but in practice, it is notoriously difficult to ensure that you don’t inadvertently create an employer-employee relationship. Ultimately, the Employment Relations Authority and the Employment Court have the power to determine the true nature of the relationship.

In some cases, the Employment Relations Authority has found that a worker is an employee, even though they had signed an agreement stating they were a contractor. This can have serious implications for the business in question, as it means they have breached employment law by denying their employee the benefits they were entitled to.

What is a contract of service?

A contract of service (also known as an employment contract) is an agreement between an employer and an employee. In New Zealand, there are three broad types of employment relationships – permanent employment, fixed-term employment and casual employment.

Permanent employment

The most common form of employment is full-time or part-time employment that cannot be terminated without cause. This means that the employment can only come to an end when the employee decides to resign from their position or because they have been dismissed from their position following a disciplinary and/or dismissal process, as set out in the employment agreement that each party has signed. 

A permanent employee is entitled to certain rights, such as minimum wage, holiday pay and sick leave. In addition, their employer is responsible for calculating and paying income tax on their behalf.

This type of employment agreement should always include a description of the work to be performed, the number of hours that the employee is required to work, whether they will be paid a wage or a salary, the amount they will be paid, the usual place of work and a clear explanation of how problems that arise during that employment relationship should be resolved. 

Fixed-term/temporary employment

An employment agreement may state that the employee has been hired for a fixed period of time. This means that their employment will terminate at the end of the fixed period.

Temporary employment is common for employees that are hired for a specific purpose. For example, you may be employed to work in a retail store over the busy Christmas period.

When hiring on a temporary basis, the employer is required to inform their employee of the reason for the fixed term. If the employment agreement does not state when (or how) the employment agreement will end and the genuine reason for the employment, the employee could be considered to be a permanent employee with a right to ongoing hours of work, even when the reason for their employment no longer exists. 

Despite only being employed for a fixed period, fixed-term employees have the same rights and obligations as a permanent employee. Similarly, the employer is responsible for calculating and paying the temporary employee’s income tax.

Casual employment

Unlike permanent or temporary employees, casual employees are not guaranteed specific hours of work by their employer. Accordingly, casual employment contracts are often used when the employer’s workload is variable and unpredictable.

For example, it might be difficult for a furniture company to predict how many furniture deliveries it needs to make to customers on any given day. Therefore, they might employ several delivery drivers under casual employment agreements so they can make deliveries as and when they need, without paying staff for hours where they have no deliveries to make.

However, the employer of a casual employee does not hold all the power. While the employer is not required to offer hours of work to a casual employee, that employee is also not required to accept the hours of work they are offered. Accordingly, this arrangement provides a significant amount of flexibility to both the employer and the employee. 

Casual employees have many of the same rights and responsibilities as permanent and fixed-term employees, but they are often paid their holiday pay as they earn it (at a rate of 8% of their wage), rather than it being accumulated by the employer and paid out when holidays are taken. 

What is a contract for services?

Instead of being hired as an employee, many people earn their income as a contractor, i.e. by contracting their services out to others rather than being employed by someone. 

There are significant differences between an employee and a contractor:

  • In order to get paid, contractors must invoice the party they are contracted to for the services they have provided. Contractors aren’t typically paid on a frequent or regular basis in the way that employees are
  • When contractors are paid, they are responsible for calculating and paying taxes (including income tax and ACC levies) from the gross sum they’ve been paid. This is not the responsibility of the person paying the contractor
  • If you are a contractor, you are not entitled to most of the rights that an employee is entitled to (such as annual holidays, sick leave, maternity leave and meal breaks)
  • A contractor is typically entitled to much more freedom than an employee. For example, contractors are generally able to enter into multiple contracts for services at any one time, whereas employment agreements often prohibit employees from finding secondary employment
  • Contractors are not able to bring a personal grievance claim against the party they have contracted to if a dispute or issue arises. Instead, they must resort to ordinary or pre-agreed dispute resolution processes

I’ve hired a contractor and they’ve signed a contract for services. Does this mean they’re not entitled to the same rights as an employee?

While the difference between an employee and a contractor might appear clear on paper, this is not always the case. The courts have often been quick to find that an individual is, in fact, an employee, despite a clear agreement between the two parties entering into a contract for services.

If a ‘contractor’ is found to be an employee, this can have dire consequences for the employer, given the obligations to withhold and account for PAYE and to provide benefits such as holiday pay and sick leave.

If a dispute arises over the status of a worker, there are many factors which the courts will take into account in determining whether the true nature of the relationship is a contract for services or an employer-employee relationship. These factors aren’t entirely black and white and they can vary from industry to industry, so it’s best to seek legal advice if you have any questions concerning your status as an employee or a contractor (or the status of someone you’ve hired).

If you would like advice regarding employment agreements or contracting, please get in touch with Jess or contact reception.


Note: This post is brief and general in nature. You should not treat it as legal advice and should seek professional advice before taking any action in relation to the matters dealt with in this post. Armstrong Murray accepts no liability for losses suffered by any person or organisation who may rely directly or indirectly on this post.