Contractor or employee?

May 2nd, 2013

I want to take on someone to do some work but I don’t know where to start – help!

How should you engage someone – as an employee or as a contractor? This is a key question for business owners because the answer will dictate the type of contract or agreement to use.

Contractors generally invoice for their work and are in business for themselves. They are not entitled to holiday pay or sick days, and are governed by general contract law. With some exceptions, such as labour-only building contracts, they are responsible for their own tax. Employees, on the other hand, have many more protections.

They are entitled to minimum holiday and leave entitlements and to be paid at least the minimum wage for their work. The Employment Relations Authority and Employment Court use a range of tests to decide whether a person is an employee or a contractor.

The Intention Test

The intention test considers what the parties meant their relationship to be, and what the commercial environment was like at the time. What did they talk about in relation to terms and conditions, what did they write down and how did they behave?

The Independence Test

This test considers the extent to which the person is in business for themselves. Are they able to turn down work from you or take on work from others? Can they do the work as and when they wish? The more independence the person has, the more likely a contractor relationship exists. The Control Test The inverse of the independence test, the more control and direction you have over the person and what they do for you, the more likely it is that they are an employee.

The Integration Test

This test looks at how far the person, and the work they do, is embedded into your business. Will they be included in all staff meetings and outings? Are they on your staff telephone list? Or is it clear they operate at arm’s length from the business?

The Fundamental Test

This test explores whether or not the person performs services as a person in business on their own account. Factors include whether the nature of the job justifies the use of an independent contractor, the behaviour of the parties before and after entering the contract, and whether the worker can be dismissed.

It is crucial to take time to get advice on matters like this. If things go wrong, you will have to deal with Inland Revenue for incorrectly paid tax, a Labour Inspector for unpaid holidays, or a personal grievance from someone you thought was a contractor, but who now claims to have been an employee. Once you have established the nature of the relationship, you can then start to look at its specific terms and conditions and determine the correct agreement to use.

This information is provided by Grow Human Resources who are able to provide specific and tailored advice to ensure the right arrangement is entered into, and the relationship is managed appropriately from the outset.

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