The benefit to your business
Why hire contractors?
There are several reasons you might choose to hire a contractor over a permanent employee.
- You can access specific skills for a short-term project without having to hire a permanent employee.
- You can grow or shrink your workforce to respond to changes in the market.
- You can save money as you grow your business, as you won’t be paying employee entitlements.
- You can eliminate admin associated with full time employees, such as payroll and KiwiSaver contributions.
- You decrease your legal liability, as in many industries contractors must carry liability insurance.
Make sure you know your potential candidate qualifies as a contractor
Employee or contractor?
As a business owner, you need to decide if the people you are employees or independent contractors. Businesses in New Zealand have got in trouble before for accidentally classifying employees as contractors or deliberately deceiving employees to avoid delivering entitlements like sick leave and KiwiSaver contributions.
If you get it wrong, you may receive penalties from the IRD and/or the Employment Relations Authority, as well as being held liable for:
- unpaid PAYE tax
- unpaid minimum wages
- holidays and leave entitlements.
Find out more about how to know the different between employees and contractors on the Employment NZ website.
What your contractor is obligated to do
Your tax obligations
Generally speaking, your contractor is responsible for paying their own tax.
However, if they work in a certain industry, you may be required to deduct withholding tax on their invoices before you pay them.
Labour-only building work, commercial cleaners, agricultural and horticulture contractors, commission sales agents, entertainers, models, company directors, freelance writers, and honoraria are all subject to withholding tax. For the full list of work that counts for scheduler payments and the rates you should deduct withholding tax, see the IRD website.
You pay withholding tax to the IRD in the same way and at the same time you pay any PAYE on employee wages. If you don’t have any employees then you’ll need to register as an employer and pay the withholding tax to the IRD by the 20th of the following month.
If the contractor provides you with a certificate of exemption from withholding tax (an IR331), you do not need to pay it.
Rights and responsibilities
All about contracts
Contractors aren’t protected by employment law and aren’t eligible for employee benefits like holiday pay or KiwiSaver contributions. You’re not required to have a contract for services, but we recommend it to protect your rights and be clear about each party’s responsibilities.
This contract for services should include:
- An overview of the work the contractor will undertake, how much, and how they’ll be paid for it.
- The expenses and allowances the contractor is allowed to claim from you.
- How disputes will be settled. A contractor cannot raise a personal grievance, so you’ll need an alternative disputes process.
- The contractor’s responsibilities around confidentiality, competing businesses, and client information. (For example, many companies forbid contractors working for a competitor or contacting clients of the company for a certain period of time after the contract period ends).
- A process for terminating the contract by either party, with a notice period.
- If you require the contractor to take out any kind of insurance and what liabilities they assume.
- If any restrictions apply, such as granting the contractor the ability to subcontract.
- The ownership of any intellectual property developed as part of the contract.
For more information about independent contractor agreements, see the Business.govt website.
Get all the systems in place
Health and safety- obligations and insurance liability
As a business owner, you’re required to meet certain health and safety standards in your workplace, no matter what type of workers you employ. You must ensure as far as reasonably practicable the health and safety of workers, and that other persons are not put at risk by that work. These obligations include:
- Maintaining a healthy and safe workplace, including layout, floor areas, lighting, guarding, ventilation, temperature, and facilities like toilets and drinking water.
- Providing training, instruction, and supervision to ensure workers are aware of risks and understand procedures.
- Providing Personal Protective Equipment if it’s being used to minimise risks, and to ensure it’s worn. (Workers also have responsibilities under the Act to ensure they wear their PPE)
- Monitoring workplace conditions and worker health, and paying costs associated with this.
- First aid facilities and equipment available and trained first aiders on site.
- An emergency plan for the workplace. This plan must be maintained and tested.
- Control of the workplace to ensure young people aren’t present in certain areas and aren’t performing certain tasks.
- Additional requirements based on industry.
It’s vital to understand your duties as a business owner, and how you can keep your workers safe. For more information about health and safety in your workplace, visit the Worksafe website.
How to get the best from your contract staff
Induction and onboarding ideas
As a business, you should have an induction/onboarding process for contractors to get them familiar with your company systems, processes, and values.
This is particularly important if you plan to hire temporary contractors on a regular basis. Putting an induction/onboarding process in place ensures your contractors can hit the ground running and eases the admin process for both sides.
With induction, you build a good relationship with your contractor from the beginning. The more you treat a contractor as though they’re part of your team and include them in company events, meetings, and decisions, the more likely they’ll perform above expectations and remain with your company for many years.
Your induction might be a simple as a welcome document to read, or it could include a separate course that needs to be completed to meet industry and health and safety regulations. Any induction process should include:
- An explanation of the contractor’s role and the objectives of their project/team.
- An outline of the company structure and who to report to or contact with questions or concerns.
- An introduction to the team, so everyone knows who is who and why each person is there.
- A briefing/course on health and safety procedures and training for specialised equipment.
- Details on how to find information, such as shared drives and documentation.
- Policies, password allocation, keycard access, document signing, and other admin tasks.
You’ll find most contractors thrive on working independently and are able to quickly acquire new skills and processes. By giving them a formal induction, you’re able to maximise their productivity and build a long-lasting relationship.
Have a process for dealing with any HR problems
Managing the performance of your contractors
Just because you don’t have an employer/employee relationship with your contractor, doesn’t mean you can be completely hands off. If you want to get the most out of them as a resource, you should:
- Set careful expectations around the work to be done, scheduling, context, and a pathway for asking questions and gaining feedback. Because contractors often aren’t on site they miss out on a lot of context and can feel isolated.
- Provide value to them through opportunities to learn new skills or work on interesting projects.
- Build a relationship by asking them about their personal life and being interested in their career. Don’t treat every interaction as purely transactional.
- Invite them to important meetings, team events and make them feel as though they’re part of your company.
- Avoid micromanaging – give freedom and create ownership in projects.
- Give useful feedback and pass on feedback from your clients. Often contractors never hear feedback about their work, so make sure they know when they do a great job and what they can improve.
- Pay them fairly and on time.
We break it down step by step
Hiring a contractor checklist
As an employer, make sure you:
- Are hiring a contractor and not a temporary employee.
- Check anyone you hire has a permit to work in New Zealand as a contractor.
- Check registrations for your contactor (for example, Licensed Building Practitioner) are up-to-date.
- Sign a contract to protect your rights and outline both parties’ responsibilities.
- Fulfill your duties to your contractor under the Health & Safety Act.
- Don’t include contractors on your employer schedule.
- Have created an induction process for contractors.
- Register as an employer and deduct withholding tax if required.
- Deduct the contractor’s fees as a business expense.
We make FlexiTime even easier!
How we can help
The Detail provides payroll support services to businesses throughout New Zealand, enabling you to easily manage a diverse workforce.
Our online FlexiTime system is designed for businesses with permanent, part-time, casual and contract staff. We eliminate payroll problems, reduce administration and improve the accuracy and speed of paying your staff, all within a cloud-based IRD-compliant payroll solution.
As well as this, our Contractor Support Service ensures your business processes and systems are standardised and your employment risk is mitigated.
- Manage the on-boarding process for each contractor.
- Set each contractor up to enter their time sheets online.
- Send you a single, GST inclusive tax invoice for all of your contractors’ hours.
- Require just one payment to cover all of your contractors.
- Process your contractors’ tax, ACC and KiwiSaver deductions.
- Pay the balance into each contractor’s bank account.
- Provide you with the reports and financial information you need.
- Manage overseas payments to local staff.