Contractor vs Employee - Key Differences Explained

Understanding the difference between Contractors and Employees is crucial for both businesses and individuals. Misclassifying a worker may lead to legal issues, financial penalties, and disputes over rights and responsibilities. This article explores the key differences between Contractors and Employees.

Who is an Employee?

An employee is someone who works under a ‘Contract of Service’ for an employer. The contract is in the form of an Employment Agreement (Individual or Collective).  The relationship is characterised by a level of control exerted by the employer over the employee's work, including how, when, and where the work is performed. Employees are typically entitled to a range of benefits, including paid leave and contributions to retirement savings.

Who is a Contractor?

A contractor, or independent contractor, operates under a ‘Contract for Service’. Contractors are self-employed individuals who provide specific services to businesses. They maintain a higher degree of independence in how they carry out their work and often have multiple clients.

What are the Key Differences Between an Employee and Contractor?

Control and Independence

Employee

• Employers dictate work schedules, processes, and performance expectations. Employees generally follow the company's policies and procedures e.g. Your boss tells you to jump, and you ask, “How high?” You’re basically a human pogo stick.

Contractor

Contractors enjoy more autonomy. They set their own hours and determine how to complete their tasks, allowing them to manage their workload and client relationships independently.  Contractors also typically provide their own tools and equipment to complete the work. E.g. Your client suggests you jump, and you respond, “Only if it’s in my contract and I can charge for the vertical distance.”

Payment Structure

Employee

• Employees receive regular wages or a salary, which will include benefits such as paid annual leave, sick leave, and retirement contributions through KiwiSaver. It’s like a buffet, but with HR paperwork.

Contractor

• Contractors invoice clients for their services, often charging an hourly rate or a fixed fee for projects. They do not receive standard employee benefits other than the thrill of invoice chasing and are responsible for their own financial management e.g. the joy of deducting your cat’s toys as business expenses.

Tax Responsibilities

Employee

• Employers are responsible for income tax (PAYE) and other deductions (like ACC levies and KiwiSaver contributions) from employees’ pay, just like a magician’s disappearing act – poof there goes your money. Employees receive pay slips detailing these deductions and a summary at the end of the tax year.

Contractor

• Contractors are responsible for their own tax obligations, including GST (if registered) and ACC contributions. They need to keep accurate financial records and file their own tax returns.

Duration and Security of Work

Employee

• Employees often have a more stable and ongoing relationship with their employer, leading to job security and opportunities for career advancement.

Contractor

• Contractors typically work on specific projects or for set periods. Their engagements can be less predictable, often leading to fluctuating income.

Determining the Relationship

When assessing whether a worker is an Employee or a Contractor, several factors are considered:

• Control - The level of control the employer has over how work is performed.
• Integration - How integrated the worker is into the business's operations.
• Financial Risk - Who bears the financial risks associated with the work.
• Provision of Equipment - Who supplies the tools and resources necessary for the job.

Employees bond with coworkers over coffee breaks and shared eyerolls during meetings.  Contractors might see someone once and never see them again.  It’s like speed dating without the awkward small talk.

Conclusion

The distinction between Contractors and Employees in New Zealand is vital for ensuring compliance with legal obligations and protecting the rights of both Workers and Employers. By understanding these differences, businesses can make informed decisions about hiring and management, while individuals can better navigate their work arrangements. Clear employment agreements, and contracts, and open communication are essential for establishing healthy working relationships that benefit all parties involved.

For HR or Health & Safety advice, get in touch with a member of the SBS Team.  Freephone 0508 424 723 or visit www.safebusiness.co.nz