Whether you are a tradie taking on contracts or a business owner hiring help, the contractor versus employee question matters more than most people realise. Get it wrong and you could face unexpected tax bills, back-payments of leave entitlements, or a personal grievance claim. Here is what the distinction means in New Zealand and how to work out which side of the line you are on.
This guide is general information for NZ businesses, not legal or tax advice - the contractor/employee distinction can be complex, so check employment.govt.nz or a licensed adviser for your situation.
The legal difference between a contractor and an employee
An employee works under a contract of service - they are part of the business, directed by an employer, and protected by the Employment Relations Act 2000. A contractor (also called an independent contractor or self-employed person) works under a contract for services - they are running their own business and providing a service to a client.
The practical consequences are significant. Employees get minimum wage protections, paid annual and sick leave, KiwiSaver employer contributions, and personal grievance rights. Contractors get none of those by default - but they gain flexibility, the ability to work for multiple clients, and control over how they do their work.
How NZ law tests the real nature of the relationship
Here is the key point: the label in your contract does not decide whether you are a contractor or an employee. A business cannot simply write "independent contractor" into an agreement and make it so. New Zealand courts and the Employment Relations Authority (ERA) look at the real nature of the relationship - what actually happens in practice, not what the paperwork says.
The ERA considers a range of factors, including:
- Control and independence - does the person control how and when the work is done, or does the business direct it?
- Integration - is the person integrated into the business (using business equipment, wearing a uniform, working set hours) or do they operate separately?
- Ability to subcontract - can the person send someone else to do the work?
- Financial risk - does the person risk their own money if the job goes wrong?
- Who supplies tools and equipment - does the worker use their own gear?
- Exclusivity - can the person work for other clients at the same time?
- Intention of the parties - what did both parties intend when they entered the arrangement?
No single factor is decisive. The ERA weighs them all together to determine what the relationship really is.
Important note: The contractor/employee distinction is a developing area of NZ law, and there have been proposals over time to reform how it is tested. Do not rely on any single resource (including this guide) as a definitive statement of current law. Always check employment.govt.nz and business.govt.nz for the latest guidance, or get advice from a licensed employment adviser or lawyer.
Tax: PAYE vs invoicing and paying your own tax
This is one of the clearest practical differences between the two arrangements.
Employees are paid through PAYE (Pay As You Earn). The employer deducts income tax, ACC earner levies, and student loan repayments before the employee ever sees the money. Employees do not usually need to file a tax return for their employment income alone.
Contractors are responsible for their own tax. They invoice clients for their services (usually plus GST if they are registered), receive the full amount, and must set aside money to pay income tax to IRD. Use our free GST calculator to work out GST on an invoice quickly. Most contractors need to pay provisional tax during the year rather than one lump sum at the end. You can estimate your take-home as a contractor using the contractor take-home pay calculator.
Schedular payments for contractors
Some contractors do not invoice their clients gross like a typical business - instead they are paid under schedular payments (also called withholding tax). This applies to certain types of labour-only contract work set out by IRD, including some trades, cleaning, security, and agricultural contracting, where the client deducts tax at source before paying you, similar to PAYE but not the same thing. The client uses a withholding tax rate you nominate (with a default rate set by IRD if you do not choose one) and issues you a tax certificate showing what was deducted. You still file an income tax return at year end and may get a refund or owe more, depending on your actual expenses and total income. Check the IRD website to see whether your type of work falls under schedular payments and what rate applies.
ACC cover
Both employees and contractors are covered by ACC for work-related injuries, but the way levies are paid differs.
Employees have their ACC earner levy deducted through PAYE. The employer also pays a separate work levy on top.
Contractors pay their own ACC levies directly, usually through their income tax or provisional tax payments. The levy rate depends on the type of work - trades with higher injury risk attract higher levies. Factor this into your rate when you set your prices.
Holidays, sick leave, and KiwiSaver
This is where employment provides protections that contractors simply do not receive.
Employees are entitled to:
- A minimum of four weeks paid annual leave
- 10 days paid sick leave per year
- Bereavement leave and family violence leave
- KiwiSaver employer contributions (currently 3% of gross pay)
- Parental leave entitlements
- Public holiday pay
Contractors receive none of these by law. If you are self-employed, you fund your own time off, save for retirement independently, and manage any periods where you cannot work. This is a real cost that many new contractors underestimate. When setting your contracting rate, add at least 20-25% on top of the equivalent employee hourly rate to account for these missing entitlements.
Who carries the risk
In an employment relationship, the employer carries most of the business risk. If a job goes wrong, the employee is generally protected. The employer holds public liability and other business insurance that covers activities carried out in the course of the work.
A contractor carries their own risk. If something goes wrong on a job - a client's property is damaged, someone is injured, or work is defective - the contractor may be personally liable. This is one of the most important practical differences between the two arrangements, and it is often the one that catches new contractors off guard.
Insurance: contractors carry their own risk
Unlike employees, a contractor is not covered by a client's business insurance policies. You are running your own business, and that means you need your own cover.
At a minimum, most contractors in the trades and services sector should consider:
- Public liability insurance - covers you if your work causes injury or property damage to a third party. This is often the first policy a client asks about. See our guide to public liability insurance.
- Professional indemnity insurance - covers claims that your advice, design, or professional service caused a financial loss. Relevant for consultants, designers, and trades with a planning or advisory element.
Going without cover is a serious risk. A single claim - a burst pipe flooding an office, a scaffolding incident, or a design error on a build - can run into hundreds of thousands of dollars. Read more about the risks of running a business uninsured.
If you are new to contracting or setting up as a sole trader, our guide to contractor insurance NZ covers the main policy types and what to look for.
Clients in commercial and government sectors increasingly include insurance requirements in their contracts. Having cover in place before you start marketing your services puts you in a much stronger position.
Contractor vs employee: quick comparison
| Employee | Contractor | |
|---|---|---|
| Tax | PAYE deducted by employer | Self-managed, provisional tax |
| Minimum wage | Yes | No |
| Annual and sick leave | Yes | No |
| KiwiSaver employer contribution | Yes (3%) | No |
| Personal grievance rights | Yes | No |
| Flexibility to set own rates | No | Yes |
| Can work for multiple clients | Depends on agreement | Generally yes |
| Carries own insurance | No (employer covers) | Yes |
| ACC levies | Partly via PAYE | Paid direct |
| Business risk | Employer | Contractor |
Setting up as a contractor
If you have determined that you are - or want to be - an independent contractor, there are some practical steps to take. Start with our guide to how to start a business in NZ for the key requirements. Most solo contractors begin as a sole trader, which is the simplest structure with the least setup. As your business grows, it is worth comparing sole trader vs company to understand when the liability and tax trade-offs shift in favour of incorporating.
Register for GST with IRD if your turnover is expected to exceed $60,000 in any 12-month period, get your business insurance sorted, and make sure any written agreements with clients clearly document the nature of the arrangement and what each party expects.
Frequently asked questions
Can a business call someone a contractor when they are really an employee?
No. The Employment Relations Authority will look past the label in a contract and assess the real nature of the relationship. If the work looks and feels like employment - set hours, directed tasks, use of the business's equipment, no ability to subcontract - the person may be found to be an employee regardless of what the contract says. The business may then owe back-payments of leave and other entitlements.
Am I a contractor or employee if I work for one client most of the time?
Working predominantly for one client does not automatically make you an employee, but it is a factor the ERA may consider when assessing independence. Other factors - control over how you work, whether you use your own tools and equipment, whether you can subcontract, and whether you bear financial risk - are also weighed. If you are unsure, check employment.govt.nz or get advice from a licensed employment adviser.
Do contractors have to pay their own ACC?
Yes. Contractors pay ACC levies directly, usually through their income tax or provisional tax. The amount depends on the type of work and your income. Factor this into your rate - it is a cost employees do not have to manage themselves because it is handled through PAYE.
What insurance does a contractor need in NZ?
At a minimum, most contractors should hold public liability insurance, which covers injury or property damage to third parties. Depending on the work, professional indemnity cover may also be needed. Some clients will not engage a contractor without proof of current insurance. See our contractor insurance NZ guide for a full rundown of the main policy types.
Can a contractor raise a personal grievance if a contract is cancelled?
Generally no - personal grievance rights are a protection for employees under the Employment Relations Act. If you are genuinely a contractor, your remedies if a contract is cancelled early sit in contract law, not employment law. However, if the ERA determines you were actually an employee despite the contractor label, you may have personal grievance rights. Always get advice specific to your situation.