Hiring: Contractors vs employees

If you’re an employer, it pays to understand the different obligations you have to employees and to contractors — there are costs to getting things wrong.

Contractors and employees: what’s the difference?

It’s important to understand how employees and contractors differ because it affects the way you treat them. The main difference is employees work for you, while contractors work for themselves.

Other differences include:

  • Employees have employment agreements with your business, while contractors are free to work for anyone. 
  • You pay PAYE and KiwiSaver on behalf of your employees, while contractors make their own payments. 
  • Employees will work where and when you tell them to. Contractors can decide how they work and even employ other people to help them. 
  • Employees generally use their employer’s equipment, while contractors use their own. 
  • Employees are required to work set weekly or monthly hours and may get paid overtime for working extra. Contractors work to agreed timeframes. 

Employment laws

Most employment laws do not cover contractors in the same way as employees. Unlike employees, contractors:

  • don’t get annual leave or sick leave
  • can’t bring personal grievances 
  • pay their own tax. 

Also, your business does not:

  • hold contractor’s records — but it does for employees
  • give contractors employment agreements.

Read more about the difference between employees and contractors(external link) on the Employment New Zealand website.

Health and safety laws apply equally to employees and contractors.

Health and safety laws apply equally to employees and contractors.

Getting it wrong

There can be consequences if you accidently classify employees as contractors. You may be liable for extra costs including:

  • unpaid PAYE tax
  • unpaid minimum wages
  • holidays and leave entitlements.

You may also incur Inland Revenue and Employment Relations Authority penalties.

Read about what to do if you get it wrong(external link) on the Employment New Zealand website.

When to hire contractors

Hiring a contractor can be a good idea if your business:

  • is short of a specific skill
  • only needs help for a specific period, eg for a one-off project
  • wants someone at short notice. 

Read our visual guide to employee types.

Read more about what to think about when hiring a contractor

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