Compliantly Engage Contractors in New Zealand

Any business hiring in New Zealand should understand the important legal distinction between who classifies as an independent contractor and who can be hired as an employee. Fines or penalties from New Zealand’s Inland Revenue and the Employment Relations Authority may be imposed on businesses who are hiring contractors under the guise of employment. 

In New Zealand, merely describing an individual as an independent contractor has no legal significance. Instead, four legal tests (intention; control vs independence; integration; and economic reality) have been developed by New Zealand courts to determine whether a worker is a contractor or an employee. Therefore, understanding the distinctions between employees and independent contractors is critical to compliantly engaging workers in New Zealand.

It is important to work with a partner like Worksuite to ensure that you have an engagement framework that properly classifies freelancers able to work as independent contractors. Alternatively, Worksuite can automatically alert you when freelance talent must be engaged directly as employees, or contractors on payroll.

Self-employment as an independent contractor is a popular income model for many individuals. Independent contractors in New Zealand operate under a ‘contract for services’, which is also known as an independent contractor agreement. Employees in New Zealand are bound by a ‘contract of service’, more commonly known as an employment contract.

In New Zealand, independent contractors are self-employed workers who operate outside of the traditional Pay-as-you-earn (PAYE) system whereby salaries or wages are directly taxed. Because their income is received from invoicing their clients, rather than in the form of a salary or wage, independent contractors must file their own individual tax income returns, as well as a Companies income tax return if they operate under a limited company. New Zealand’s courts have developed four legal tests to determine whether a worker is an employee or a contractor.

1. The intention test aims to determine whether the relationship aims to be that of an employer and employee, or principal and contractor. It is judged by assessing the written agreement between the two parties across four key criteria: does the worker have an employment agreement (contract of service); does the worker receive holiday pay; does the worker get paid extra for working on public holidays; and does the worker have a contract for services.
2. The control vs independence test assesses how much freedom the worker has over four set criteria. An independent contractor has control over the work they agree to complete, as well as when and where they will complete it. They also have no set hours, are free to control their own availability, and set their own schedule in line with their clients’ needs. Employees, on the other hand, are much more strictly controlled in all of these areas.
3. The integration test considers whether the worker is fundamental to the organization. If they are, then they will be considered an employee. Under these guidelines, an employee is an integrated person who may work with the company’s equipment, is crucial to the wider team, is reimbursed for work-related expenses, wears a uniform with the company logo, and is not paid by their results. For contractors, the opposite applies in all five of these areas.
4. The fundamental/economic reality test examines the financial implications of the agreement between the two parties. A contractor charges a set fee for work completed and is not entitled to the minimum wage. They also, in the majority of circumstances, pay their tax directly to the Inland Revenue and must register for GST once they reach the NZ$60,000 threshold. A contractor must pay their own ACC levies, can subcontract the agreed work to someone else, subject to the contract terms, can make a profit from their work, can work for multiple clients, issues invoices after the completion of projects, and carries an element of financial risk with each project they take on.

Independent contractors in New Zealand work under one of two main categories: sole trader or limited company.

• Sole trader: Independent contractors operating as sole traders can quickly begin to accept work as an independent contractor. Sole traders must complete an IR3 tax return and are still responsible for paying back any debts they incur during their business operations, potentially putting their personal assets at risk.

• Limited company: Independent contractors can set up a company by incorporating it with the Companies Office. Company directors must file annual tax returns with both the Companies Office (IR4) and the Inland Revenue (IR3).

There are two primary engagement models for working with independent contractors in New Zealand:

• Direct engagement of the independent contractor, either under their personal name (if operating as a sole trader) or under the company’s name (if operating as a limited company).
• Contract for services: Under these agreements, a contractor commits to completing a specified job for a set fee. The contractor retains control over all significant elements of how the project is completed. They can subcontract the work. They can determine their own schedule for completing the work, as long as it fits within the agreed deadline. And they also provide the tools and equipment needed to complete the job.

• A contractor can also be hired through an umbrella company, which formally acts as the contractor’s employer. The principal pays the umbrella company for the completed work, and the umbrella company deducts its fees and any necessary tax deductions before paying the contractor. This model has many advantages for emigrants to New Zealand, who can contract as they wish while potentially acting as a sponsor for workers seeking to start a new life in New Zealand. 

In the vast majority of cases, contractors in New Zealand are paid directly (without deductions) once they have completed their work and issued a relevant invoice. The fee is fixed in the agreed contract for services. Standard payment terms in New Zealand are typically 30 days.

Independent contractors hired on a direct engagement are not on a company’s payroll. Their fees are paid without any deductions at source for tax or other benefits unless they have requested schedular payments and the principal has formally agreed to this request.

Independent contractors must file annual IR3 tax returns (and IR4 returns if they are operating as a limited company). They must register for GST and file monthly, bi-monthly or bi-annual GST returns if their annual income exceeds NZ$60,000. They must also pay their own Accident Compensation Corporation (ACC) levies.