This article is general information only and isn’t legal advice. Employment law changes, so check your situation with a qualified adviser.
Plenty of owner-operators bring someone on as a contractor because it feels simpler. There’s no payroll, no holiday pay and less paperwork. The person sends an invoice, you pay it, and everyone gets on with the work.
The problem is that the invoice doesn’t decide what the relationship is. The law looks at how the arrangement actually works. If it works like employment in practice, it can be treated as employment, and the costs can be back-dated.
What the law looks at
Since 21 February 2026, New Zealand has had a “gateway test” for contractors. A worker is treated as a contractor if all of these are true:
- There’s a written agreement saying they’re an independent contractor.
- They’re free to work for others.
- They don’t have to be available at set times, or they can subcontract the work.
- The arrangement doesn’t end just because they turn down extra work.
- They had a reasonable chance to get independent advice before signing.
If the arrangement meets every point, the person is a contractor. If it misses even one, the older test applies. That test looks at the real nature of the relationship. It considers how much control you have over how, when and where the work is done, how integrated the person is in your business, who carries the financial risk, and what both parties intended.
I put it simply: if it looks like a duck and quacks like a duck, it’s a duck. Suppose you set their hours, supply their tools and uniform, manage them day to day, and they work only for you. Calling them a contractor doesn’t change much.
Why the agreement doesn’t settle it on its own
A written contractor agreement is now one of the gateway criteria, so it matters more than it used to. But it’s only one of five. If the other conditions aren’t met in practice, the agreement won’t protect you. What happens day to day counts for more than what’s written down.
The gateway test also only applies from 21 February 2026. For any period before that, the older test still applies, and claims can reach back up to six years.
The real cost difference
Owners often compare a contractor’s hourly rate with an employee’s wage and conclude the contractor is more expensive. That’s rarely the full picture.
A wage is only part of what an employee costs. On top of it you’ll typically pay for annual holidays, public holidays and sick leave. You’ll also pay employer KiwiSaver contributions of at least 3.5% of gross pay, ACC levies on their earnings, and the cost of running payroll. A contractor covers their own tax, ACC, leave and retirement savings, which is why their rate is usually higher.
If someone you’ve treated as a contractor is found to be an employee, those costs don’t disappear. They can come back as arrears, along with the risk of a personal grievance claim.
If you think you’ve got it wrong
Start by checking each arrangement honestly against the five gateway points. Look at how the work actually happens, not just at the paperwork. Then consider the wider picture of control, integration and risk.
If an arrangement clearly doesn’t fit, don’t try to fix it by rewriting the agreement or changing someone’s status overnight. Both can create new problems. This is the point to get advice from an employment lawyer or a qualified HR adviser rather than guess. Inland Revenue and ACC apply their own rules for tax and levies, so involve your accountant too. A conversation now costs far less than defending a claim later.
Getting your team structure right
Choosing between employees and contractors isn’t only a legal question. It’s an operational one. The right structure depends on how the work needs to be done, how much control you need, and what each option really costs once everything is counted.
So here’s a question worth asking: if you looked at each person working in your business today, would the arrangement on paper match how the work actually happens?
If you’d like to talk through how your team is set up, you can book a $45 one-on-one session with me. We’ll look at the operational and commercial side of your team structure, and I’ll point you towards the right legal advice where you need it.
Useful resources
- Employee or contractor – Employment New Zealand’s guide to the gateway test and the common law test
- Employment Relations Act changes – Employment New Zealand’s summary of the February 2026 changes
- KiwiSaver changes – Inland Revenue’s information on the new contribution rates
- Understanding ACC levies – ACC’s guide to the levies employers and contractors pay
- Employment Leave Act – MBIE’s information on the law replacing the Holidays Act in 2028
