Why "cheaper as a contractor" often is not
The contractor invoice looks clean. No KiwiSaver, no ACC, no leave, no payroll. So contractors feel cheaper. Run the real numbers and the gap narrows fast, and sometimes flips.
Take a $70,000 employee. Add employer KiwiSaver at 3.5% ($2,450) and an ACC work levy for a builder ($1,071), and you are at about $73,500 before a vehicle or tools. Now the contractor. To take home the same $70,000 after they cover their own ACC, sick days, holidays, downtime between jobs, gear, insurance, and accountant, plus a margin, a genuine contractor has to charge a good deal more per hour. That is why a fair contractor rate for the same work is often $55 to $70 an hour when the employee equivalent is nearer $35. You are not comparing a salary to an hourly rate. You are comparing two people carrying the same costs, just split up differently. Our cost of hiring calculator breaks down the employee side in full.
The four tests, in plain words
New Zealand courts do not go by the label on the contract. They look at how the work actually runs, using four tests together. No single one decides it.
- Intention. What did you both intend, and what does the written agreement say? It matters, but it is a starting point, not the finish.
- Control. Who decides the what, when, how, and where? The more you direct the hours, methods, and tools, the more it looks like employment. A real contractor runs their own show.
- Integration. Is the person part and parcel of your business, or running their own? Someone in your uniform, on your roster, doing core ongoing work looks integrated, so employee.
- Economic reality. Who carries the risk and the profit? A contractor can make or lose money, works for others, invoices, and supplies their own gear. An employee just gets paid.
From 21 February 2026 there is also a new gateway test. If a working arrangement ticks every one of its criteria, a written contractor agreement, real freedom to work for others, control over their own time and subcontracting, the right to refuse work, and a chance to take advice before signing, the worker is treated as a specified contractor. Miss any criterion and you fall back to the four tests above.
The classification check, and what it is not
The check in the tool above walks you through the same questions a court would ask: who controls the work, whose tools, whose risk, is it ongoing or a defined job, does the person work for others. Answer them honestly about the real relationship, not the paperwork you would like to rely on.
What it gives you is an honest read: leans employee, leans contractor, or genuinely mixed. That is a signal, not a ruling. Only the Employment Relations Authority or a court can decide status, and they do it on the specific facts. If the tool says mixed, or you are relying on the outcome for a real hire, treat that as your cue to get proper advice rather than pick the answer you prefer.
What happens when IRD or the ERA disagrees
This is the part that turns a labelling shortcut into a real bill. If a worker challenges their status and the Employment Relations Authority or a court finds they were really an employee, the contract calling them a contractor does not save you.
You can be ordered to pay unpaid holiday pay, employer KiwiSaver, and any minimum wage shortfall, potentially going back years, plus penalties. The person also picks up employee rights, including the ability to raise a personal grievance for something like an unfair dismissal you never thought applied. Separately, Inland Revenue can come back for PAYE you should have deducted. A worker who was happy being a contractor can change their mind the day the work ends, which is exactly when these claims tend to land. If a genuine contractor is doing employee-shaped work, the cheaper option now is the expensive one later. When it is close, a short conversation with an employment adviser is a lot cheaper than the back-pay.