What is the difference between an Employee and a Contractor?

In New Zealand, whether you’re an employee or a contractor makes a big difference for your rights, pay, and protections. It is important to understand what your employment status is and how it impacts your rights and entitlements.  

What is the difference between an employee and a contractor?

An employee works under an employment agreement, also called a contract of service. A contractor, or independent contractor, works under a contract for services  meaning they are self-employed and are running their own business, even if they only work for one client. Because of these differences, contractors and employees have different entitlements and responsibilities. Here’s how things typically differ between an employee and a contractor in New Zealand:

Feature or condition	Employee	Contractor
Pay and Tax	Paid via payroll; employer deducts PAYE tax and ACC levies.	You invoice the client; pay your own income tax, ACC levies and GST as required.
Leave and holidays	Entitled to paid annual leave, sick leave, public holidays, holiday pay etc.	No statutory entitlement to paid leave, holiday pay or public holiday penalty rates unless contract says so.
Work control and schedule	Employer usually decides when, where and how you work. You’re more “managed.”	You generally control how, when and where you do your work.  You are more independent.
Tools and business risk	Employer often provides tools, and they carry business risk.	You often supply your own tools or equipment; you carry business risk (profit or loss).
Inclusion in the business	Usually “part of” the business.  The employer integrates you into teams and operations.	You are more like an outside service provider, not part of the employer’s internal structure.
Employment law protections	Covered by employment laws, such as the Employment Relations Act 2000 (ERA), minimum wage laws, leave laws etc.	Generally not covered by ERA or many of the protections for employees.  Civil or commercial law applies instead.

Because of these differences, employees enjoy a range of protections and benefits including stability, paid leave, and wage protections. Contractors enjoy flexibility and independence but also take on more risk and fewer entitlements.

How to know whether you’re really an employee or a contractor

It’s not just about what you signed.  What matters is the real nature of the working relationship. Courts and authorities look at how things work in practice.  Here are some of the main tests used:

Control test: Who decides how, when, and where the work is done? If you are told exactly what to do and when, that suggests employee status.

Integration test: Are you part of the employer’s business?  Do you use their tools, work alongside their regular staff, and form part of their organisation? Or are you more separate, like an outside service provider?

Economic reality test: Are you carrying financial risk (e.g. paying your own expenses, possibly losing money) like a business, or are you simply earning a wage with little risk?

Intention/contractual test: What does your contract say? Is it called a “contract of service” (for employees) or “contract for services” (for contractors)? 

In short: if you look and act like an employee, you likely are an employee even if your contract says contractor.

The government recently proposed adding a clearer “gateway test” to the ERA. Under this test, if a worker meets a set of criteria, they would be defined as a contractor and that status couldn’t easily be challenged.  The criteria include things like having a written independent contractor agreement, not being restricted from working for others, not having fixed availability times, and being free to decline extra tasks.  But if those criteria aren’t met, the traditional “real nature” assessment under the ERA would still apply, meaning workers could still challenge a contractor label if it doesn’t reflect reality.  This change aims to give more certainty but also underscores the need for workers and businesses to understand what kind of relationship they really have.

Recent decisions on employment status in the New Zealand courts. 

A recent example of the challenges faced in clarifying employment status was seen when the Supreme Court threw out Uber’s appeal against treating drivers as employees.  Four drivers took the ride share company to the Employment Court in 2022 arguing that they should be considered employees and receive benefits such as leave entitlements, holiday pay and a minimum wage.  The Employment Court found in favour of the drivers, which was then appealed unsuccessfully by Uber at the Court of Appeal, prior to the Supreme Court decision.  The decision was based on the fact that the Uber model means that drivers and riders cannot effectively select each other, and given Uber handles charging for rides and dealing with issues, the passenger would not reasonably think they were contracting the driver.  The drivers were represented by union E tũ who will now fight for compensation.  You can read more about the Uber case here. 

A Mathews Walker advocate recently won a similar case at the ERA on clarifying the employment relationship. The Authority issued a preliminary determination confirming that Client L was an employee, not an independent contractor, from the time she became an account manager in 2016. Although the company said her status changed to that of contractor, there was no written agreement, no explanation of the implications and PAYE continued to be deducted throughout her time in the role. The Authority found she had no understanding that she was supposedly moving to contractor status.  

In making this decision, the Authority applied the real nature of the relationship test and found that in practice she was treated as an employee. The employer exercised significant control over her work, set her targets, directed her sales strategy and allocated her clients. She worked exclusively for them, was integrated into their business, attended their meetings and events, used their systems, office, email and phone number and represented their brand to customers. She had no entrepreneurial independence, no other clients and no genuine financial control over her earnings.  The Authority held that there was no shared intention that she be a contractor and that the arrangement lacked any of the key features of someone working on their own account. It concluded that she was, in substance and reality, an employee, allowing her substantive claims to now proceed.  Her claims against the employer are ongoing.  You can read more on the ERA’s determination here.  

As the definition of the employment relationship can be complex, there is a benefit in seeking legal representation from your Union or an employment advocate if you believe you have been disadvantaged based on your employment status.   

FAQs

Can I work as both an employee and a contractor at the same time?

Yes. It’s possible to have one job as an employee (with an employer) and at the same time do contracting work for someone else provided each engagement meets the legal criteria for that status. 

If my agreement says “contractor” does that automatically make me a contractor?

Not necessarily. What matters is how the working relationship actually works: who controls the work, how integrated you are, who provides tools, who pays tax, and who carries risk. A “contractor” label won’t override substance.

If I’m a contractor, can I ask for paid holidays or sick leave?

Unless your contract with the client specifically agrees to those, no. Contractors are generally not covered by leave entitlements under leave laws.

What if I think I was wrongly treated as a contractor when I really work like an employee?

Under the current law, you can ask the Employment Relations Authority (or the court) to decide.  They will look at the real nature of your relationship. If they find you were really an employee, you may get back pay, leave entitlements, and other protections.

If you’re working, it matters whether you are an employee or a contractor. Being an employee gives you important protections: regular pay, leave, legal rights, and more. Being a contractor gives you flexibility and independence but also more responsibility and risk. If you’re unsure which you are, check how things work in practice, not just what the paperwork says. And if things don’t feel right, you may want seek legal advice to check your rights.  Get in touch for a free consultation today.  MathewsWalker.co.nz | 0800 612 355

Online form

Disclaimer: The information provided in this blog is for general informational purposes only and should not be considered legal advice. While we strive to keep the information accurate and up to date, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained on the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. For specific legal advice tailored to your situation, please contact a qualified legal professional.