Employee vs contractor – the differences
Hiring workers as either employees or contractors can be lawful provided that the correct type of working arrangement is used in each situation. Employees work for you while contractors work for themselves.
You need to know whether your worker is an employee or a contractor because your responsibilities as a business will be very different. The courts have developed some legal tests to help you tell the difference.
How to decide – the legal test
– Intention test – what the parties intended relationship will be.
– Control vs independence test – the greater the control exercised over the worker the more likely they are an employee.
– Integration test – if the work performed by the worker is fundamental to the organisation they are more likely to be an employee.
– Fundamental/economic reality test – looking at the full circumstances of the work relationship to determine its economic reality.
Consequences of getting it wrong
If you hire someone as a contractor when they are actually an employee you may be liable for many costs. These potentially include unpaid PAYE, minimum wages, holidays and leave entitlements, penalties from Inland Revenue and/or penalties from the Employment Relations Authority, and being banned from bringing in workers from overseas. Also, you may get negative publicity that could harm your customer goodwill, reputation and potentially the value of your business.
For more information please see the Inland Revenue update.
As a member you can also contact Livewire HR for further advice:
Phone: HR LIVE (0800 475 483)
Email [email protected]