A practical guide to classifying workers in New Zealand.

Why classification matters

How you classify the person you're engaging shapes nearly everything that follows: what tax you deduct, whether KiwiSaver applies, what leave they're entitled to, and the process you'd need to follow if the arrangement ends.

It's not a paperwork decision. It's a decision about what the working relationship actually is. The label has to match the reality, because if it doesn't, the law looks past the label to what's really going on.

There are two questions to work through, in this order:

1. Employee or contractor? This is the fundamental distinction.
2. If employee, what type? Permanent, fixed-term, or casual. All three are types of employee with the same underlying employment rights.

This module walks through both questions.

Employee or contractor?

The fundamental distinction

An employee and a contractor have fundamentally different legal relationships with you.

Employee Works under an employment agreement. Entitled to minimum wage, annual leave, sick leave, bereavement leave, KiwiSaver contributions from you, and the full protections of employment law. You deduct PAYE from their wages and file with IRD every payday. The relationship sits under the Employment Relations Act and is governed by employment law.

Contractor Works under a contract for services. Independent: they manage their own tax, their own ACC levies, their own business. Not entitled to employment benefits like leave or KiwiSaver contributions. The relationship sits under contract law, which means there's no requirement for the kind of fair process employment law demands if it ends.

The risk of getting it wrong Because contractors are cheaper and easier to end arrangements with, some businesses have historically tried to label workers as contractors when they were functionally employees. Courts and the Employment Relations Authority have consistently seen through this. Misclassification can mean back-paying annual leave, KiwiSaver contributions, and PAYE going back years, plus penalties and interest. For more, see Employees vs Contractors: A Small Business Owner's Guide.

The gateway test

The gateway test

The rules for confirming a contractor arrangement got clearer in early 2026. A new statutory gateway test gives businesses an upfront, definitive way to confirm that a working arrangement is genuinely a contractor relationship.

If all four criteria are met, the worker is legally a "specified contractor". That classification can't be challenged through the Employment Relations Authority or Employment Court, which is the certainty the old system lacked.

1. Written agreement The agreement states the worker is an independent contractor (or is not an employee).

2. Freedom to work for others The worker is permitted to work for other businesses, including competitors. They just can't do that work at the same time as the work they're doing for you. Engaging someone for the equivalent of full-time hours doesn't by itself count as a restriction on working for others.

3. Flexibility in when they work, or the ability to subcontract Either the worker isn't required to work at set times, set days, or for a minimum period, or they're allowed to subcontract the work to someone else. Businesses can vet subcontractors where it's justified by the nature of the work. The contractor can also decline additional work from you without the arrangement ending.

4. Reasonable opportunity to seek independent advice The worker had a reasonable opportunity to seek independent advice before signing.

What to know about the gateway test

Important notes

All four must be met If any one isn't, the gateway test doesn't apply, and the older common law test takes over.

It's not retrospective The gateway test only applies to arrangements entered into from 21 February 2026. Anything before that date is assessed under the common law test. If a dispute spans both periods, different conclusions could apply to different timeframes. For example, someone might be found to have been an employee before 21 February 2026 and a specified contractor after.

It's not a loophole The gateway test confirms genuine contractor arrangements. It doesn't repackage employment relationships as contractor ones. If the day-to-day reality looks like employment, the risk remains regardless of the paperwork.

The common law test

The common law test (still relevant)

When the gateway criteria aren't met, the common law test applies. It looks at the overall reality of the working relationship across four factors.

Intention What did both parties intend? The written agreement matters, but it's not conclusive if the day-to-day reality looks different.

Control How much control do you have over how, when, and where the work is done? More control points toward employment.

Integration Is the person genuinely operating their own business, or are they functionally part of yours?

Economic reality Who bears the financial risk? Does the worker have their own business, multiple clients, and responsibility for their own profit or loss?

Spotting the difference

In practice

Looks like employment if:

• The person works set hours or must be available at specified times
• You provide the tools, equipment, or workspace
• You pay a regular wage rather than receiving invoices
• The person needs your permission for time off
• You direct how the work is done, not just the outcome
• They have no other clients or business activities

Looks like a genuine contractor arrangement if:

• The person invoices you for services
• They have their own business registration, IRD number, and possibly GST registration
• They provide their own tools and workspace
• They work for multiple clients
• They set their own hours within agreed project requirements
• They bear financial risk and can make a profit or a loss
• They can subcontract or delegate the work

Mistakes to avoid

Common mistakes

Labelling someone a contractor when the reality is employment The agreement doesn't make it so. The nature of the relationship does. A contract that says "contractor" at the top is worth very little if the day-to-day reality is employment.

Control creep Starting with a genuine contractor arrangement, then gradually adding direction, set hours, or integration into the team without ever revisiting the legal structure. One of the most common ways arrangements drift into misclassification.

Going with what the worker prefers If someone asks to be set up as a contractor because it suits their tax situation, that's not protection for you. The classification has to match the reality of the work, not the preference of either party.

Treating the gateway test as a workaround It exists to confirm genuine contractor arrangements, not to repackage employment relationships. Tick-box compliance with the four criteria won't survive scrutiny if the underlying reality is employment.

Further reading

• Employees vs Contractors: A Small Business Owner's Guide, PaySauce
• Casual Employment Arrangements, PaySauce
• Contracted hours, availability clauses and shift cancellations, PaySauce
• Employee or contractor?, Employment New Zealand

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