Employees vs contractors: What do startups need to know?
An employee and an independent contractor are not the same under New Zealand law. The difference matters because each relationship carries different legal rights, responsibilities, and business risks. Founders should understand the distinction before engaging anyone to help build their business.
Why this matters for startups
Early-stage startups often need flexibility. Contractors can provide specialist expertise without becoming part of the permanent team, while employees may be better suited to ongoing roles that are central to the business.
The challenge is that calling someone a contractor does not automatically make them one. New Zealand law looks at the reality of the working relationship rather than just the wording of a contract. If a person is treated like an employee in practice, they may be regarded as an employee regardless of the label used.
What is an employee?
An employee works for a business under an employment relationship. Employees are generally integrated into the business and operate under the employer’s direction and control.
Employees are entitled to a range of statutory protections under New Zealand employment law, including minimum employment standards, leave entitlements, and protections relating to dismissal and workplace conduct.
What is an independent contractor?
An independent contractor operates their own business and provides services to clients under a commercial arrangement.
Contractors typically have greater freedom over how work is performed, may work for multiple clients, and are generally responsible for managing their own tax obligations, insurance, and business costs.
How is the difference determined?
A person will be a contractor if they satisfy the recently introduced ‘Gateway’ test. There are a number of elements to the test that need to be strictly complied with including the person having a written agreement that confirms they are a contractor, the right to work for other companies or people, and the ability to decline work that is offered without consequence.
A worker who does not satisfy the Gateway test can still legitimately be a contractor however this requires an assessment of the broader relationship. Relevant considerations include:
- The level of control exercised by the business.
- Whether the person is integrated into the business.
- Whether they operate like someone in business on their own account.
Practical takeaways
Choosing the right engagement model from the outset can help reduce legal and operational risk. As a startup grows, the distinction may become increasingly important, particularly where team members move from project-based work into ongoing roles within the business.
FAQs
Can a contractor become an employee over time?
Yes. If the nature of the relationship changes, the legal classification may also change.
Can a contract alone determine status?
No. The written agreement is relevant, but the day-to-day reality of the relationship is also considered and often of greater significance.
Why does the distinction matter?
Employees have access to a range of important protections and entitlements including in relation to minimum wage, holidays and leave, and protections against unfair dismissal. Contractors only have access to any protections or entitlements set out in the contract.
Are contractors always lower risk for startups?
Not necessarily. Contractors can provide flexibility, but an incorrectly classified worker can create legal and compliance issues.
Should founders review existing arrangements as the business grows?
Yes. A relationship that made sense at launch may look different as a startup scales and roles become more permanent.
Or message us here and one of our experts will contact you within 48 hours.
Special thanks to Partner Gareth Clendinning and Associate Tom Mohammed for preparing this article.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
