IN THE KNOW —
Independent Contractor, Labour-Only Contractor or Subcontractor? There is often confusion between these three categories of contractor, and consequently some doubt as to which contract to use in any given case. This article explains the difference and provide some guidance on the issue.
Independent Contractors These are people who would normally be your employees, but for the fact that one or both of you prefer that they be treated as independent contractors instead. There are certain advantages and disadvantages for both parties in doing so. The main advantages for the independent contractor is that they can generally charge a higher rate, they pay income tax four times a year rather than PAYE out of every pay packet, and they can deduct certain expenses from their income for tax purposes. The main advantages for you the builder is that they are not covered by employment law so they are not entitled to be paid when they are on leave and they don’t enjoy the normal protections against dismissal and unfair treatment.
There are certain tests that tax law and employment law use to differentiate between true employees and true independent contractors, and it pays to get some professional guidance on those tests so you don’t stray across the line. From the independent contractor’s perspective the main disadvantages are that they have to prepare financial statements, file GST and income tax returns, and pay their tax when the time comes, and they aren’t entitled to all the protections that employment law would otherwise give them. The main disadvantages from the builder’s point of view is that independent contractors are supposed to have a greater degree of freedom than employees do, in terms of how and when they carry out their work.
Independent contractors typically only work on your projects and under your supervision, just as your employees do – so they are effectively your staff members. However, it is important not to treat them in exactly the same way as your employees, because if they are employees in reality, then the law will treat them as employees regardless of what label you put on the relationship. That means in the event of a falling-out between the two of you, the independent contractor may claim that he was in fact an employee, and insist on all the paid leave and protections that he was entitled to, right back to the day he started. There are certain tests that tax law and employment law use to differentiate between true employees and true independent contractors, and it pays to get some professional guidance on those tests so you don’t stray across the line. Using the NZCB independent contractor agreement certainly helps to achieve that, but it may not be enough to get you home.
Labour-Only Contractors These are builders who genuinely are the bosses of their own businesses and work directly for arm’s-length clients, rather than independent contractors who have all their work fed to them by one ‘boss’ and who very rarely deal with the clients direct. Typically labour-only builders work for many different clients over their careers, although they may do repeat work for certain clients and in some cases may get all their work from one or more volume building companies. So they tend to be the more mature builders who have served their time and have ‘gone out on their own’, but at the same time they either don’t want, or aren’t given, the responsibility for managing the project. That means that they usually don’t engage the subcontractors or procure the building materials, and they are just one of a number of skilled tradesmen working on the project under the direction of the project manager – whether that is the property owner, or the volume building company which has contracted with the property owner.
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