Hiring Employees or Contractors

Hiring Employees or Contractors

Even a micro business will probably never be highly efficient with an owner trying to do everything. If you want to grow your business, you will need help, probably starting with jobs that you hate but must be done.

But will you hire an employee or a contractor? You must understand the difference because the cost of getting it wrong is high.

The Difference Between Employees and Contractors

You can’t just hire someone and decide they are either an employee or a contractor. Regardless of what you call them, their true status depends on the working arrangement.

While the arrangement may have elements of employment and elements of contracting, by reviewing a series of criteria, it should become clear which one wins. The overarching principle is control.

An employer tells an employee how, when and where to work. An employee will often work on the employer’s premises, at set times, performing their job as prescribed by the employer. A contactor chooses how, when and where they work. A contractor can often work at their own premises, on their own schedule, in their own way.

An employer provides equipment and reimburses employees’ job-related expenses. A contractor provides their own tools and covers their own costs.

An employer pays a fixed rate or salary. A contractor charges on their terms, either by the job, hour, performance or other arrangement.

An employee is usually restricted to working for one employer. A contractor is free to work for many customers.

Employment Requirements

Employing staff implies legal obligations under the Employment Relations Act, Holidays Act and a few other laws. Requirements include:

  • Employment Agreement – You need a compliant, written employment agreement for each employee. The agreement must contact certain mandatory clauses and can contain other optional clauses. You can build an agreement using the NZ government’s Employment Services tool:
    https://www.employment.govt.nz/starting-employment/employment-agreements/employment-agreement-builder/
  • Employer Registration with IRD — This can be done at ird.govt.nz or ask your accountant to help.
  • Pay Employees for Time Worked – Including time and half if they’re required to work on a public holiday.
  • Pay Employees for Leave – Entitlements include a minimum four weeks annual leave, five days sick, three days bereavement leave and statutory holidays.
  • Calculate and Deduct Pay As You Earn (PAYE) from Wages – Including the employees’ income tax calculated per their tax code, Kiwisaver deductions if applicable, and ACC earner levies.
  • File PAYE Returns – For small businesses, PAYE returns are due by the 20th of the month following the pay date. From 1 Apr 2019, they must be filed each time an employee is paid.
  • Pay PAYE to IRD – Including PAYE deductions as above and employer Kiwisaver Contributions. For small businesses, PAYE is due by the 20th of the month following the pay date.
  • Pay ACC Employer Levies –ACC will invoice the employer based on wages information passed onto them by IRD
  • Comply with Employment Related Legislation – Including minimum wage requirements and following correct procedures when terminating employment.

Contracting Requirements

If you hire a contractor, you will have an Agreement for Services instead of an Employment Agreement. This is much more flexible.

Generally, a contractor will have no leave entitlements, pay their own tax – although sometimes the contracting business will deduct withholding tax – and pay their own ACC levies.

Getting it Right

If your “contractor” turns out to be an employee, you may be liable for tax you should have deducted plus penalties, ACC levies, payments for leave, and potentially other breaches of employment law.