Factsheet: Contractor vs. employee

Understanding the difference between an employee and an independent contractor is a fundamental responsibility for any New Zealand employer. How you engage people affects your obligations for pay, leave, tax and more. Misclassifying a worker can lead to significant legal and reputational risks.

This factsheet outlines the key differences under New Zealand law and best practices for managing your workforce. 

Download the factsheet for a quick overview of everything you need to know.

What is a contractor (or independent contractor)?

In New Zealand, a contractor is a self-employed individual or entity hired to complete specific services or projects under a ‘contract for services’. Unlike employees, contractors run their own business, invoice for their work and have autonomy over how and when the work is completed. They may operate as sole traders or through a company, and often take on several clients simultaneously.

Contractors are typically engaged for specialised or temporary needs rather than core business functions and bear personal responsibility for commercial risk, insurance and the quality of their own work.

Key characteristics of a contractor

Most contractors have a significant degree of independence and flexibility in the way they operate. Some of the core features include:

• Control over their own hours and methods of completing the work
• The ability to subcontract or delegate tasks
• Supplying their own tools or equipment
• Bearing the commercial risk, with the potential for profit or loss

They often work for more than one client and are not embedded within a single organisation in the way employees are.

Contractor obligations and responsibilities

Contractors are responsible for managing their tax obligations with Inland Revenue, including paying income tax, GST (if registered) and provisional tax when required. They also pay their own ACC levies, arrange any required business insurances, submit invoices for completed work and maintain accurate business records.

Contractors take on any liability for poor work, and they are not eligible for paid leave, KiwiSaver contributions or other employee entitlements.

What is an employee under New Zealand employment law?

An employee is engaged to work within a business under a ‘contract of service’, or employment agreement, which is required by law. Employees work under their employer’s direction, are paid wages or salary and are entitled to a range of statutory protections. 

The employer decides how, when and where the work must be performed and provides the employee with what they need for the job. The ongoing nature of employment usually means regular hours and integration with the team and company culture.

Core features of the employee status

There are a few features that apply to someone classified as an employee:

• Works under the employer’s supervision or direction
• Is integrated with the business and team
• Typically has regular or rostered hours
• Tools and equipment are supplied by the employer
• The working relationship is exclusive or prioritises the employer’s needs
• Employment is usually ongoing, not limited to a short-term project

Statutory rights and protections for employees

Employees benefit from a legal floor of protections, including payment of at least the minimum wage, four weeks’ annual holidays after 12 months’ service, paid public holidays each year, ten days of paid sick leave per year once eligible, paid rest breaks and unpaid meal breaks.

Other entitlements include access to parental leave, bereavement leave, family violence leave and the right to raise a personal grievance. They should work in a healthy and safe environment and If applicable, should experience fair termination processes.

Why classification matters 

Getting the classification right is not a matter of choice. It is a legal requirement and a significant risk to your business if you get any details wrong. If a worker you have engaged as a contractor is later found to be an employee, the consequences can be severe, including financial penalties, back-payments and reputational damage.

Legal penalties, back-pay and remedial orders

Liability for arrears of wages and unpaid holiday pay is common, and orders may be made to pay compensation for distress or humiliation. Significant financial penalties can be issued by the Employment Relations Authority and decision-makers within the business may even be held personally liable.

Tax, ACC and social obligations

If a person is found to be an employee, the employer can be responsible for unpaid PAYE deductions, missed KiwiSaver contributions, and ACC levies. There is also a risk of interest or penalties being applied to all unpaid amounts.

Employment obligations triggered by misclassification

Once misclassification is found, the business must provide all minimum employment entitlements owed, follow employment law processes and allow access to dispute resolution, including personal grievances.

When it makes sense to engage a contractor vs hire an employee

Choosing between an employee and a contractor will depend on your business needs. Contractors offer flexibility for short-term, project-based or specialist requirements, while employees are better for roles needing consistency and deeper integration with your business. Some businesses successfully use a blend, such as hiring a contractor for a key project while maintaining core functions in-house.

Best practices for drafting agreements and managing the relationship

Reduce risk by using clear, professional agreements that fit the real nature of the relationship. Contractor agreements should define the scope of work, deliverables, how and when the contractor is paid, their liability, intellectual property and termination terms. 

Download our sample independent contractor agreement here. 

Employment agreements should describe the role, pattern of work, pay, leave entitlements, confidentiality, and dispute resolution. There are a number of compulsory details you should include in these, and they are a legal requirement for every employee. 

Download our employment agreement checklist here.

Regularly review actual working arrangements and update agreements if roles change. Seek independent legal advice if you are unsure

Frequently asked questions

Ready to get it right?

Don’t leave classification to chance. Download our comprehensive contractor vs employee factsheet to understand the exact differences between the two.

The information in this article is current as at 30 October 2025, and has been prepared by Employment Hero Pty Ltd (ABN 11 160 047 709) and its related bodies corporate (Employment Hero). The views expressed in this article are general information only, are provided in good faith to assist employers and their employees, and should not be relied on as professional advice. Some information is based on data supplied by third parties. While such data is believed to be accurate, it has not been independently verified and no warranties are given that it is complete, accurate, up to date or fit for the purpose for which it is required. Employment Hero does not accept responsibility for any inaccuracy in such data and is not liable for any loss or damages arising directly or indirectly as a result of reliance on, use of or inability to use any information provided in this article. You should undertake your own research and seek professional advice before making any decisions or relying on the information in this article.