Contractor vs Employee - The basics

What is the difference between contractors and employees?

Many business owners make the common mistake of thinking both are the same. However, they have different requirements and obligations.

What is a Contractor?

A contractor is a self-employed person your business can engage for their services. The contractor will enter into an agreement with you to confirm that they are providing their service for an agreed rate or fee. A contractor will confirm whether they are GST registered or not. A contractor will often invoice you for their services after the job is done and then move on to the next job. If you include a contractor in your payroll, withholding tax is paid directly to the IRD at 20%. 

Contractors are not associated with or integrated into your business. They are not entitled to minimum employment rights. Usually, civil law will govern a contractor’s rights and duties. 

You would usually hire a contractor under an independent contractor agreement, although you can hire a contractor without a written contract. Having a document in writing is beneficial.

An independent contractor agreement can outline:

• party names;

• description of work to be carried out;

• how long the contract will last;

• responsibilities of the contractor;

• payment process; and

• contract cancellation process.

What is an Employee?

An employee is any person you employ under your business to do work in return for a payment. Before hiring an employee, you should consider whether they will suit your business needs. Under employment law, you cannot terminate their employment just because you are unhappy with them or their work. 

This agreement will outline the terms and conditions of the employment. As a result, the employment agreement should include:

• name of employer and employee;

• location of the workplace;

• job description;

• leave entitlements;

• hours and days of work;

• wage or salary amount;

• termination process; and

• redundancy pay.

Payments

An employee is usually paid through wages or a salary, which you will agree upon and state in the employment agreement. Your business will need to pay tax on the employee’s behalf and any KiwiSaver or Student Loan deductions. 

Alternatively, a contractor will usually send you an invoice. Usually, a contractor will advise you how much they will do the work for and you can either agree or decline. If you agree to the amount, it should be stated in the contractor’s agreement. Furthermore, the contractor will pay their own tax and ACC levies. 

If you would like to discuss this or need any further information or assistance please contact Fiona Tate on 0226 739638 or email contact@sortedout.co.nz.

DISCLAIMER: This information does not represent legal advice.