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employment

Independent Contractor vs. Employee: The legal tests

Key Takeaway

In New Zealand, the distinction between an independent contractor and an employee determines legal rights and obligations. The law assesses the "real nature of the relationship" rather than just the contract label, considering factors like control, integration, and whether the person is in business on their own account, as outlined in the Employment Relations Act 2000.

Independent Contractor vs. Employee: The Legal Tests in New Zealand

In New Zealand, the classification of a worker as either an employee or an independent contractor has significant legal implications for both the worker and the entity engaging their services. This distinction determines the rights and obligations under employment law, including entitlements to minimum wage, leave, and protection against unfair dismissal.

The Legal Distinction

A worker is a general term referring to anyone performing work for another party. Within this category, legal distinctions are drawn between:

  • An employee is a person who works for another person or entity (an employer) under a contract of service. Employees are subject to employment law entitlements and protections [Source: Employment Relations Act 2000, s 6].
  • An independent contractor is a self-employed person who provides services to another person or entity (a client) under a contract for service. Independent contractors typically operate their own business and are not covered by New Zealand employment law [Source: Employment Relations Act 2000, s 6].

Why the Distinction Matters

The classification of a worker directly impacts their rights and the obligations of the engaging party:

  • Employees are entitled to a range of protections and benefits, including the minimum wage [Source: Minimum Wage Act 1983, s 4], annual leave [Source: Holidays Act 2003, s 16], sick leave [Source: Holidays Act 2003, s 65], public holidays [Source: Holidays Act 2003, s 45], parental leave [Source: Parental Leave and Employment Protection Act 1987], and the right to raise a personal grievance for issues such as unfair dismissal or discrimination [Source: Employment Relations Act 2000, Part 9]. Employers also have obligations regarding Kiwisaver contributions [Source: KiwiSaver Act 2006, s 101] and Pay As You Earn (PAYE) tax deductions.
  • Independent contractors do not receive these entitlements. They are responsible for their own income tax, Goods and Services Tax (GST), Accident Compensation Corporation (ACC) levies, superannuation, and insurance [Source: Income Tax Act 2007; Goods and Services Tax Act 1985; Accident Compensation Act 2001]. They also do not have access to the personal grievance process under employment law if their contract is terminated.

The Legal Test: "Real Nature of the Relationship"

The Employment Relations Act 2000 (ERA) is the primary legislation governing employment relationships in New Zealand. Section 6 of the ERA states that when determining whether a person is an employee, the Employment Relations Authority or the Employment Court must consider the real nature of the relationship between the parties, not just the label given to it by a written agreement [Source: Employment Relations Act 2000, s 6]. This means that even if a contract states a person is an independent contractor, the courts will look at all the circumstances to determine the true legal status.

Courts and the Employment Relations Authority assess a range of factors to determine the real nature of the relationship, often referred to as the "global" or "fundamental" test. No single factor is decisive; instead, all factors are weighed together [Source: Employment Relations Act 2000, s 6].

Key factors considered include:

  • Control: This test assesses the degree of control the engaging party has over how, when, and where the work is performed. An employee is typically subject to detailed control and direction regarding their work methods, hours, and location. An independent contractor generally has significant autonomy over these aspects, deciding how best to achieve the agreed outcome [Source: Derived from case law interpreting Employment Relations Act 2000, s 6].
  • Integration: This test examines how integrated the worker is into the engaging party's business. Employees are typically an integral part of the organisation, often wearing uniforms, attending staff meetings, using company equipment, and being subject to company policies and procedures. Independent contractors typically operate as a separate business entity providing a service to the organisation [Source: Derived from case law interpreting Employment Relations Act 2000, s 6].
  • Fundamental Test (or Global Test): This overarching test considers whether the worker is performing services as a person in business on their own account. It involves assessing whether the worker bears the financial risk and has the opportunity for profit, similar to an independent business [Source: Derived from case law interpreting Employment Relations Act 2000, s 6].

Other factors that contribute to the overall assessment include:

  • Intention of the Parties: While not determinative, the express intentions of the parties as set out in their agreement are considered [Source: Derived from case law interpreting Employment Relations Act 2000, s 6].
  • Provision of Tools and Equipment: Who provides the necessary tools, equipment, and resources for the work? Employees often use employer-provided resources, while contractors typically provide their own [Source: Derived from case law interpreting Employment Relations Act 2000, s 6].
  • Opportunity for Profit and Risk of Loss: Does the worker have the potential to make a profit or suffer a loss depending on how efficiently or effectively they perform the work? Independent contractors often bear this risk and opportunity, whereas employees typically do not [Source: Derived from case law interpreting Employment Relations Act 2000, s 6].
  • Right to Delegate or Subcontract: Can the worker delegate their tasks to another person, or subcontract the work to others? Independent contractors often have this right, while employees generally do not without explicit permission [Source: Derived from case law interpreting Employment Relations Act 2000, s 6].
  • Exclusivity: Is the worker free to perform similar services for other clients, or are they exclusively tied to one engaging party? Independent contractors often work for multiple clients, whereas employees typically work exclusively for one employer [Source: Derived from case law interpreting Employment Relations Act 2000, s 6].
  • Method of Payment: Is payment regular wages or salary, or is it based on invoices for specific outcomes or projects? Employees typically receive regular wages, while contractors typically invoice for services rendered [Source: Derived from case law interpreting Employment Relations Act 2000, s 6].

The Employment Relations Authority and courts weigh all these factors collectively to determine the true nature of the relationship, ensuring that individuals receive the correct legal protections and entitlements.

When to Seek Independent Legal Advice

Determining worker status can be complex. Individuals or businesses requiring clarification on their specific situation or seeking to understand the implications of a particular employment or contractor arrangement should consult with an employment lawyer or contact the Community Law Centres for free legal advice.

Key Resources