Employee vs Independent Contractor
Why do we have to define Employee or Contractor?
A taxpayer’s obligations vary depending on their employment status. There are two categories of status, one is employee, and the other is independent contractor.
How to determine employment status?
When considering whether an individual is an employee or independent contractor, all relevant matters, written and oral terms and how the parties operate in practice will be taken into consideration to determine the real nature of the relationship. S CB 6 of the Employment Relations Act 2000 provides tests on whether an individual is an employee.
These five employment relationship tests can help us determine employment status. No individual test will be conclusive in determining the result. The combined weight of all relevant factors will determine employment status.
- Control test
The greater the control by the employer over work content, hours and methods, the more likely it is that the individual is an employee. However, it is not a conclusively test, a high degree control does not lead to an employee status (TNT World Express Ltd v Cunningham).
- The independence Test
A worker with greater freedom to choose who to work for, where to work, the tools used and so on, is more likely to be an independent contractor.
- The integration Test
Looks at how integrated the individual is in the business of the hirer. Is the work done by the employee essential for the business? A person is considered as an employee of the organisation if:
a. The type of work is commonly done by employee
b. Continuous (Not a one-off operation)
c. For the benefit of the business rather than for the benefit of the worker
- Intention test
Intention is typically indicated in the written contracts. An employee has a contract of service whereas an independent contractor has a contract for services.
- Fundamental test
The test involves examining the total situation of the work relationship to determine its economic reality. Is the type of job the hiree is doing justifiable to be done by a contractor? E.g. teachers in a school should not be hired as contractors but a plumber can be.
What are the different benefits and obligations?
Once employment status has been determined through the tests above, the obligations and benefits for each can be better understood.
For an employee:
- PAYE must be deducted by the employer
- Employee cannot register for GST
- Employee cannot claim any deduction for employment related expense in deriving their income.
- Employees are protected by legislation such as Wages Protection Act, Holidays act and ACC entitlements
- Employees are entitled to sick and annual leave
For an Independent contractor:
- They may subject to schedular payments, which the tax is withheld by the payer.
- Contractors can register for GST and charge GST for their service.
- Contractors can deduct expense related to their work.
- Contractors have to pay relevant accident compensation earner and employee premiums for themselves.