By understanding the difference between a contractor and and employee, it becomes more clear what costs need to be factored in to your pricing if you choose to work freelance.
There are many differences between contractors and employees that affect the rights and responsibilities of the hiring organisation and the employee.
An employee is a person employed to do any work for hire or reward under a contract of services (commonly called an
employment agreement). The hire or reward is almost always a wage or salary. Employees have all minimum employment rights under employment laws (e.g. the Employment Relations Act 2000, Minimum Wage Act 1983 and the Holidays Act 2003), e.g.
- at least the minimum wage
- holiday and leave entitlements, and
- a written employment agreement.
Employees also have extra rights, like the right to take a personal grievance. The employer must keep employee records such as their employees’ employment agreement, and wage, time, and holiday and leave records.
- Self-employed people are sometimes referred to as contractors, or independent contractors; these terms mean the same thing.
- A contractor is engaged by a principal (the other party) to perform services under a contract for services (commonly called an independent contractor agreement).
- Contractors are self-employed and earn income by invoicing the principal for their services.
- Contractors pay their own tax and ACC levies.
- Most employment-related laws don’t cover contractors. This means they don’t get things like annual leave or sick leave, they can’t bring personal grievances, they have to pay their own tax, and general civil law determines most of their rights and responsibilities.
- Businesses don’t have to hold contractor records.