What the new contractor rules mean for New Zealand businesses

Why it matters whether someone is an employee or a contractor

In New Zealand, being classified as an employee comes with important legal protections, such as minimum wage, paid leave and union rights. Independent contractors, on the other hand, do not get those benefits. 

This is why the question of who counts as an employee is so important and the Employment Court’s Chief Judge Inglis has described employment status as the “gateway” to these rights. (E Tū Inc v Rasier Operations BV [2022] NZEmpC 192, [2022] ERNZ 966 at [4].)

Determining who is an employee and who is an independent contractor is not always easy.  The current legal test under section 6 of Employment Relations Act 2000 looks at the true nature of the relationship, which often leads to confusion and expensive court cases, like the recent Uber case which has been recently heard in the Supreme Court.

Both the Employment Court and Court of Appeal determined that the Uber drivers in question were employees, but each finding this on a different basis, demonstrating the difficulty with determining exactly who is an employee. (Rasier Operations BV v E Tū Inc [2024] NZCA 403.) The Supreme Court has not yet released its decision on the matter.

What's changing  

For a long time, there has been a ‘grey area’ between employees and independent contractors, especially for individuals who do not fully fit into either category.

In this ‘grey area’, these individuals will often miss out on the benefits employees have, but will also miss out on the freedoms true independent contractors enjoy.  Where the individual believes they are an employee, and the hirer believes they are an independent contractor, the individual would need to challenge that status with the hirer or through legal action

Discussion about the potential reform of contracting relationships has spanned numerous governments.  In late 2023, in the National & ACT Coalition Agreement, it was agreed that the Government would "maintain the status quo that contractors who have explicitly signed up for a contracting arrangement can’t challenge their status in the Employment Court". (New Zealand National Party & ACT New Zealand Coalition Agreement 24 November 2023.)

This caused confusion because, under the current law, independent contractors can challenge their status. In September 2024, some clarity on this position was provided when the Government stated that it would be introducing a new “gateway test”.  This “gateway test” now forms part of the Employment Relations Amendment Act, which will likely come into force before the end of the year. 

The five-part gateway test

The gateway test is in the form of a five-criteria test to uphold independent contractor status.  If the working arrangement meets all of the following five criteria, the individual will be classified as an independent contractor and will be unable to bring a claim alleging that they are actually an employee:

• There is a written agreement with the worker, saying that they are an independent contractor; and
• The individual can work for other businesses (even competitors), except while they are performing work for the hirer; and
• either
  • The individual is not required to work specific hours or day; or
  •  The individual can sub-contract the work to another person (who may be required to undergo vetting by the hirer to ensure compliance with any statutory requirements before being sub-contracted to the hirer); and
• The hirer cannot end the contract just because the individual turns down extra work; and
• The worker had a reasonable opportunity to seek independent advice before entering into the arrangement.

If one or more of these criteria are not met, the existing test will apply, and the Employment Court will determine the worker’s status based on the current section 6 test from the Act.

Challenges and legal uncertainty

While the gateway test aims to simplify matters, it could create new problems:

• Label vs. reality: The requirement for a written agreement stating an independent contractor relationship may encourage “window dressing,” where the label of ‘contractor’ masks an employment relationship.
• Subcontracting ambiguity: Although subcontracting must be permitted, exceptions based on statutory compliance (e.g, immigration or health and safety laws) are vague. It’s unclear how suspected non-compliance with statutory requirements will be handled, i.e. is it sufficient for a hirer to consider the subcontractor may be non-compliant with statutory requirements or will a hirer need to establish actual non-compliance.
• Uncertainty regarding termination: The test restricts when a contract can be ended which may clash with standard independent contractor agreements which often allow for termination without any reason.
• Limited scope: The test appears tailored to gig economy roles like Uber drivers, limiting its usefulness across broader contractor arrangements.
• Increased risk of employment status claims: Businesses trying to meet the test by modifying contracts may accidentally highlight issues of current non-compliance.
• Influence of new criteria on existing legal test: Even when the gateway test doesn’t apply, courts may be influenced by its criteria, potentially shifting how the traditional section 6 test is interpreted.

Implications for New Zealand businesses

This is a good time for businesses to review current independent contractor arrangements.  If businesses are looking for certainty, this is an opportunity to check whether current contractors meet the five gateway criteria or whether future contracting arrangements could. 

For now, while the intention was to create clarity, this will likely only be achieved for a small group of independent contractors as many businesses may find it hard to meet all five of the gateway criteria due to the realities of the relationships they have with workers.

Charlotte Evans is a Senior Associate in the Employment and Health and Safety team at Dentons New Zealand.