It’s an exciting time watching your business really take off and hit its straps – although, that excitement is usually balanced by the reality of the new challenges and responsibilities that invariably come with growth.
For most businesses, more work generally means a need for more staff, and for many a key choice: hire employees or engage independent contractors. While the choice between the two may seem reasonably simple, there are important factors to consider when deciding and implementing which option is suitable for your business.
A person engaged under a ‘contract for service’ is commonly known as an independent contractor. Whereas a person hired under a ‘contract of service’ is an employee under an individual employment agreement. While a contract for service and a contract of service sound similar, the relationship with your business is very different.
Independent contractors
An independent contractor under a contract for service is generally considered self-employed or representing their own business as a sole operator. The contractor is responsible for providing the services negotiated in their contract with your business. Depending on the contract, they may have greater flexibility around when and how their services are provided and, in some instances, where from.
Independent contractors are also responsible for managing their own tax responsibilities, annual leave, expenses, insurance and other aspects commonly involved in running a business. In some instances, independent contractors may decide to form a company to operate under. This extra layer may be for a number of reasons, including tax, asset protection or even the intention to sell the business further down the track.
Additionally, an independent contractor may have specific experience and skills that can benefit your business. A contractor’s varied experience may introduce new solutions to problems you have been unable to solve. Depending on the availability of contractors, they can enable quick adaption to changing market needs.
The benefits of engaging an independent contractor can include: greater flexibility, fulfilment of specific needs in your business, cost savings and simplified payments and no PAYE. And as employment laws do not cover contractors, they are not entitled to annual or sick leave and are unable to raise personal grievances. You can also terminate the arrangement by giving the acceptable notice agreed in the contract.
Hiring an employee
Alternatively, you may determine that hiring an employee is more suited to your business’ needs. Reasons could include that you want a specific commitment from them, such as you require them to work at a specific place for a specific time. If decided in their employment agreement, they may have to follow particular company policies, dress a particular way or wear uniforms.
An employee will also give you continuity within your business. This may be important not only from a team-building and company culture perspective, but, also, consistency for your customers and clients. Other important attributes are trust, dedication and loyalty. Employees usually fully commit to your business allowing you to foster their strengths and abilities, and they become an asset for your business.
But, hiring an employee has greater responsibilities than taking on an independent contractor. An employee is entitled to the protections of a variety of legislation: Employment Relations Act 2000, Minimum Wage Act 1986 and Holidays Act 2003 and the Immigration Act 2009. These Acts provide minimum rights to the employee, such as the right to have a written employment agreement, to act in good faith and reasonably towards one another.
Employers must also ensure their employee has the right to work in New Zealand and are paid the minimum wage (that rate is set to change in April 2019). The employer must maintain accurate records and provide particular information to the employee.
There are also various requirements relating to breaks, annual leave, public holidays, sick leave, bereavement leave and parental leave. In addition, there are several other minimum rights which need to be included in an employment agreement and provided to the employee.
Finding the right mix
Contractors and employees don’t need to be used exclusively. Your business may require a full-time staff member and contractors through the busier periods. In many instances you will already have a good idea of what works for your business. If not, speaking with your trusted business advisor will assist in determining which choice is appropriate.
Once a choice has been made, it is critical to correctly document and implement the relationship. Many companies get this wrong, and it's not always as simple as it sounds. Take, for instance, an employee. They can be permanent part-time or full-time, casual or on a fixed-term contract. From a legal perspective, there can also be situations where a casual or fixed-term employee evolves into being a permanent staff member. If this is the case, there can be serious implications when it comes to determining a number of the minimum rights.
Be aware that it can sometimes be easy to blur the lines between an employee and contractor, a sort of “picking the benefits from both options”. This temptation can be very costly. For example, a business may want to engage a contractor, as there is more flexibility and less responsibility in relation to the statutory requirements and exposure to personal grievances. At the same time, they want to control their hours, performance of particular tasks, or further integrate them into the business. These elements are often considered by the Employment Court and the Employment Relations Authority as transitioning a person from being a contractor to an employee. As a result of this, many companies do not recognise the person is entitled to the minimum requirements afforded to an employee. There may also be situations where an employee is completely unaware that their actions may be muddling the distinction between an employee and a contractor.
As you can see, there are numerous pros and cons to engaging an independent contractors or employees. There can be serious ramifications for employers in getting this wrong. Taking advice before signing either a contract for service or contract of service, and setting up the right relationship from the outset, is a small sacrifice when compared to a costly, stressful personal grievance.