When an Independent Contractor Agreement is right for your NZ business

By On Your Terms co-founder Claire Bodle
July 2024

First, what is an independent contractor?

Independent contractors are self-employed people who operate their own business and are responsible for their own taxes and ACC levies. They are usually paid an hourly or daily rate, or work on commission, or they might undertake a project for a fixed price. They are not covered by the New Zealand Employment Relations Act 2000 and therefore are not automatically entitled to rights such as minimum wage, holiday pay or sick leave.

By way of comparison, an employee is a person who works for a business in exchange for payment under an employment agreement. Employers are required to deduct tax from the employee’s wages, known as PAYE, and pay the PAYE to the Inland Revenue on behalf of the employee. As they are covered by the Employment Relations Act, their employer must provide holiday pay, sick leave and all other employee benefits.  Employees can be employed on a permanent, casual or fixed-term basis.

For more information on the difference between an employee and an independent contractor please see our blog Employee vs contractor - What’s the difference? Why does it matter?

7 benefits of hiring an independent contractor

1. Flexibility: Independent contractors offer businesses flexibility as you can hire on a project-by-project basis or for a specific period of time. Or, if you hire a contractor on an ongoing basis, both the contractor and the business can typically terminate with limited notice (eg, one month). This can allow your business to scale up or down based on your needs without the long-term commitment of hiring a permanent employee.
2. Lower fixed costs: Hiring an independent contractor may also reduce your fixed costs, as you’ll have less overheads relating to equipment, office space etc. You also won’t have the costs of sick leave and holiday pay. Be aware though, a contractor’s rate may sometimes be higher than an employee's to compensate for these factors.
3. Specialised skills: Independent contractors often have specialised skills and expertise in a particular field that businesses may not have in-house. Hiring a contractor allows your business to access these skills temporarily without needing to hire a permanent employee. For example, you may be undertaking an IT change within your business that you need someone to manage for 3 months, but you won’t have an ongoing need for IT support.
4. Reduced administrative burden: Hiring an independent contractor can reduce your business’s administrative burden as contractors are responsible for their own taxes and ACC levies and won’t automatically be signed up to KiwiSaver. This could save your business time and resources in managing payroll and compliance.
5. Focus on core business activities: By outsourcing certain tasks to independent contractors, your business can focus on its core activities and strategic priorities. With everyone focusing on what they’re good at, your business can allocate its resources more efficiently. For example, if you take on a contractor to manage the social media for your business, you save the time it would take one of your existing team members to upskill, and they can instead focus on their core role (for example, sales).
6. Innovation and fresh perspectives: An independent contractor might bring fresh ideas to your business, which can lead to change and growth. If your contractor has experience across various industries and has worked in numerous businesses, they will have developed a range of hands-on experience and knowledge, which may be more difficult for permanent employees to gain.
7. Financial risk management: Hiring independent contractors can help businesses manage cost risks associated with fluctuations in demand, economic uncertainty, and changing business conditions. Contractors allow businesses to adapt to changing circumstances without the financial commitments of hiring permanent employees.

Key things to include in your Independent Contractor Agreement in NZ

If an independent contractor feels like the right move for your business, you’ll need to get an Independent Contractor Agreement in place to check you’re both on the same page, and to have rules in place if anything goes wrong.

Your agreement will need to cover:

• The scope of work – use as much detail as possible
• Pay rate and payment terms – how much they’ll get paid and the basis for payment (eg, number of hours worked or what needs to be delivered)
• Duration of the agreement and any renewal rights
• Cancellation rights – including notice periods
• Intellectual property – what rights you’ll each have to any IP that’s created
• Confidentiality obligations
• Dispute resolution mechanisms

Key points

Hiring an independent contractor can be a great strategic decision for businesses looking to access specialised skills, increase flexibility, reduce costs, and focus on core business activities. If you’re looking to take on an independent contractor, make sure you agree the terms upfront with our Independent Contractor Agreement.