Employee vs contractor – who cares?

By and - , Build 157

The nature of the building industry means it’s often easier to hire contractors rather than employees. But make sure you understand the difference, and its implications, or you may be leaving your business exposed to considerable risk.

EMPLOYERS OFTEN get confused when deciding whether someone is an employee or a contractor, but getting it wrong can mean serious consequences for your business. It may mean that you are not meeting your legal obligations, and your employee may not be getting their full legal entitlements, which could put you at risk.

Construction industry likely to breach

Deciding if someone is an employee or contractor is very important in industries where workflow varies, such as the construction industry.

It may seem easier to hire a contractor to cover a build rather than bring on a new employee, especially if there is no ongoing work at the end of the project. However, contractors and employees have different rights and responsibilities, so you need to understand the differences between each. Labour inspectors will take action when they see breaches of this, so it pays not to get caught out.

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What’s the difference?

There are several factors that can show the difference between a contractor and an employee.

First, we need to consider how both the Employment Relations Acts and Inland Revenue define ‘employee’ and ‘self-employed contractor’. The definition pins on who is in control of the agreement. A further key element is in looking at whether the position forms an integral part of your business.

Definitions in brief

Employee – the employer is in control of how and when the work is done, number of hours worked, quality of the work, rate of pay, place of work and tools for the job.

Contractor – the individual is in control of how and when the work is done, what rate is charged and who performs the work. The individual may hire someone else to perform the work.

Seek help if unclear

Sounds pretty simple, right? Not necessarily. A person can be classed as an employee in one line of work and as a self-employed contractor in another.

If you are unsure, seek help from your human resources advisor. There are many grey areas, and the Courts have developed tests to help you tell the difference. Use the checklist in Table 1 as a guide.

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Inland Revenue cares

So who cares, and why does it matter? The minute you hire someone as a contractor when they are actually an employee, you may have to pay extra costs to the employee and Inland Revenue. These may include unpaid PAYE tax and unpaid minimum wage and leave entitlements.

You could also be fined by Inland Revenue and the Employment Relations Authority, and there is no hiding. As part of their investigations, they will be allowed to view all of your communication with the individual to assess the true nature of the relationship.

The consequences can be expensive, so it pays to take a moment to review what you are doing in your own business.

Table 1 Employer checklist to decide whether employee or contractor 
  EMPLOYEECONTRACTOR
Control The individual is hired or rewarded as part of your business and under your control. The individual agrees to carry out work as an independent contractor not as part of your business or under your total control.
How You decide how the work is done and supervise it. The individual decides how the work is done.
Who The employee has to do the work themselves. The contractor can arrange for someone else to do the work.
Exclusive The employee only does work for you. The contractor can do work for more than one business.
Business as usual The employee’s work is part of your normal business activity. The contractor’s work is often specialised and not part of your normal business activity.
Payment You pay them by wages or salary.s You pay them in lump sum or by account.
Rate of pay You pay a similar rate of pay to other employees doing the same job or similar jobs. The rate of pay is the contractor’s charge-out rate.
Taxes You pay ACC levies and deduct PAYE. The contractor pays their own ACC levies, GST, overheads and taxes.
Tools You provide the employee with tools and equipment or give them monetary compensation for using their own tools. The contractor provides their own tools, equipment and clothes necessary to perform the work.
Contracts You have an employment agreement with the individual. The contractor has a contract for service.
Hours of work You set the hours when the individual works. The contractor decides when they work.
Leave You pay holiday pay, sick leave, bereavement leave and public holidays. The contractor has no leave. If they are not at work, they are not paid.
Responsibility under the Health and Safety at Work Act (HSWA) As a person conducting a business or undertaking (PCBU), you are responsible, so far as reasonably practicable, for ensuring the health and safety of your workers/employees. As a PCBU you are responsible, so far as reasonably practicable, for ensuring the health and safety of a contractor while they are carrying out work for you. As the contractor is also a PCBU, you must consult, cooperate and coordinate with each other regarding health and safety duties while carrying out the work. You must satisfy yourself that the contractor is doing all that is required under the HSWA.
Company events The employee is invited to company social events. The contractor is unlikely to be invited to company social events.

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Note

This is intended as general advice only. Contact your advisor or Staples Rodway with your specific queries.

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Articles are correct at the time of publication but may have since become outdated.

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