Independent Contractors & Employment Guidelines in New Zealand
Contract length allowance
There is no set limit on the length of contracts with independent contractors, however, genuine contracts are generally shorter than 1 year or until the completion of a task. The longer the relationship between the contractor and the client, the more likely it is that the Employment Relations Authority will classify it as employment.
Fixed-term contract limitation
In New Zealand, fixed-term contracts are usually seasonal, to complete a project or to cover another employee on leave - lasting less than 1 year. Extending a fixed-term contract might make change the employment status to permanent. Employers must have a genuine reason based on reasonable grounds for the fixed term and the employee must be told about this reason.
Employees on fixed-term contracts are not contractors — they’re employed by the company and entitled to all the same benefits as a permanent employee. Employers cannot use a fixed-term agreement instead of a probationary period to test whether or not an employee is right for the job.
What makes someone an employee
The main distinction between employees and independent contractors is that an employee is someone who serves their employer in the employer’s business while a contractor is someone who carries on a trade or business of their own.
A person considered an employee usually falls under these fundamental characteristics:
- The organisation for whom the work is performed has the right to direct the manner of performance of the work
- The commercial risk is borne by the organisation, as is the responsibility for any loss occasioned by poor workmanship or negligence by the employee
- The organisation prescribes the times and locations for the performance of the work
- The remuneration is in the form of a salary or wages and is paid on a periodic basis based on hours worked
- ACC premiums, KiwiSaver and PAYE tax are deducted by the organisation when paying the worker
- The organisation provides the equipment and materials for the work
- Any use of the worker’s own equipment or materials is compensated by reimbursement or by an allowance
- The organisation has discretion in relation to task allocation and termination of the engagement
- The worker cannot perform similar work for other organisations
- The worker is presented to the public as being part of the organisation
- The worker has no inherent right to delegate their work to another, though there may be power to delegate some duties to other workers
- The worker receives benefits such as annual, sick or long service
Employee vs contractor
The main differences between employees and contractors are:
- are covered by the Employment Relations Act 2000 (ERA) and the Minimum Wage Act 1983;
- have the right to annual leave, public holidays, sick leave, and bereavement leave, as provided by the Holidays Act 2003;
- cannot be lawfully dismissed unless there is substantive justification and a fair process is followed;
- fulfil their tax and ACC obligations through their employers.
- aren’t protected by the Employment Relations Act 2000, Minimum Wage Act 1983 and Holidays Act 2003.
- cannot bring personal grievances;
- do not receive holiday or leave entitlements;
- are responsible for their own ACC payments;
- file and pay their tax;
- may need to be GST registered.
- are responsible for their own KiwiSaver payments.
- pay accident insurance levies.
Both employees and contractors are protected in the following areas:
- the Health and Safety at Work Act 2015.
- the Criminal Records (Clean Slate) Act 2004.
- the Human Rights Act 1993.
- the Privacy Act 1993.
Penalties for Employee Misclassification in New Zealand
Misclassifying workers with the intention to avoid paying and giving employees minimum employment rights is known as sham contracting. If an employer is caught in a sham contract, they will have to give the employee the following employment entitlements:
- Unpaid PAYE tax.
- Unpaid minimum wages.
- Holidays and leave entitlements.
Moreover, the employer will be penalized by the Employment Relations Authority. Fines vary from case to case and start usually around $30,000. Directors and managers may be held accountable and be personally fined for their involvement in sham contracting.