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Summary
- An employee works within your business under an employment agreement and receives statutory rights such as leave, minimum wage and protections.
- A contractor is self-employed, works independently, invoices for services and is generally not covered by employment laws.
- The distinction depends on the real working relationship, including control, integration and whether the person operates their own business.
- This guide explains the differences between employees and contractors for New Zealand business owners and how to assess the relationship in practice.
- It is prepared by LegalVision’s business lawyers, a commercial law firm that specialises in advising clients on employment classification matters.
Tips for Businesses
Focus on how the working relationship operates in practice, not just the contract. Consider control, independence and integration into your business. Use the legal tests to assess classification and review arrangements regularly to avoid misclassification risks and potential penalties.
An employee works within your business under an employment agreement and receives statutory rights and protections, while a contractor is self-employed and provides services independently under a contract for services. The key difference lies in the nature of the working relationship, including the level of control, integration into the business, and legal obligations owed, and misclassification can expose your business to legal and financial risk. This article explains the differences between employees and contractors in New Zealand and how to determine the correct classification.
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. Before hiring a contractor, you should consider how many hours you will need them for and their charges. A contractor will often invoice you for their services after the job is done and then move on from your business.
A contractor usually has more control over their work than an employee. Furthermore, they are not associated with or integrated into your business. Unlike employees, you do not need to provide constant supervision. Usually, a contractor will be able to work independently.
What is an Employee?
An employee is any person you employ under your business to do work in return for a payment. Usually, employees will be employed until they resign or face job termination. Unlike contractors, they do not complete set tasks and then leave your business. 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.
Independent Contractor Agreement or Employment Agreement
If you hire an employee, you and the employee need to sign a written employment agreement. This agreement will outline the terms and conditions of the employment, and providing one is your legal obligation under New Zealand employment law. 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;
- dispute resolutions;
- termination process; and
- redundancy pay.
Alternatively, 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. This will allow both parties to agree and establish the details of the work. Furthermore, a written contract can help you avoid future legal disputes. 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.
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 earn their income by sending 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.
Key Statistics
- 18.4%: Self-employed workers comprised 18.4 per cent of New Zealand’s employed workforce in 2025.
- 22%: Employment relationship problems lodged with the Employment Relations Authority increased by 22 per cent in 2024.
- 74%: 74 per cent of New Zealand enterprises had no paid employees as at February 2025.
Sources
Employment Laws
All employees have minimum employment rights that you must acknowledge under various employment laws. As a result, if you do not fulfil the minimum rights, you may face a penalty from the Employment Relations Authority. Minimum employment rights include:
- minimum wage;
- equal pay and rights;
- health and safety requirements;
- break and leave entitlements;
- trial periods;
- right to join a union; and
- having their employment and pay records kept accurately by your business.
On the other hand, most employment laws do not cover contractor rights because they are not employees. As a result, contractors do not have entitlements to annual or sick leave. They cannot bring personal grievances, and your business does not have to keep employment records. General civil law governs most contractor rights and responsibilities.
How to Differentiate Between an Employee and Contractor
To understand whether a person is an employee or a contractor, you need to focus on the real nature of their working relationship with your business. New Zealand courts have some legal tests you can use to tell the difference.
| Intention Test | Looks at what the parties intended the relationship to be. |
| Control vs. Independence Test | Determines how much control the person has over their work. If the person has great amounts of freedom and can choose how they work, then they are probably a contractor. |
| Integration Test | This looks at whether the work done is part of the business and whether the work is continuous or a one-off. |
| Fundamental or Economic Reality Test | You must look at the real nature of the working relationship and whether the person is genuinely in business on their own account. This is the most important test applied by the courts to determine if someone is an employee or an independent contractor. |
Key Takeaways
When understanding the differences between contractors and employees, you should look at the agreement type, payment entitlements, and whether employment laws cover their work. Furthermore, you can use the four legal tests to confirm whether a person is an employee or contractor. Correctly classifying your workers is essential, otherwise, you may fail to meet your minimum employment obligations.
If you need help understanding the differences between an employee and an independent contractor, our experienced employment lawyers to assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee.
Frequently Asked Questions
You can use the intention, control vs. independence, integration, and economic reality test.
Most employment laws do not cover contractors because they are not employees. They are not entitled to minimum employment rights. Usually, general civil law will govern a contractor’s rights and duties.
No. Employees receive minimum entitlements like leave and minimum wage protections, while contractors are generally not covered by employment laws and do not receive these benefits.
You assess the real working relationship using tests such as control, integration, intention and economic reality, rather than relying only on the contract label.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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