Contractor or employee? How the new gateway test changes the rules for NZ businesses

Published Friday 11 September 2026

Table of contents

• What is the difference between a contractor and an employee in NZ?
• What is the gateway test?
• The 5 criteria of the gateway test
• What happens if a worker doesn't pass the gateway test?
• The common law test and how it still applies
• Key differences between contractors and employees
• Tax and payroll obligations: contractor vs employee
• Risks of getting worker classification wrong
• How to classify your workers: a practical checklist
• Simplify contractor and employee management with Xero
• FAQs on contractor vs employee classification in NZ

Key takeaways

• On 21 February 2026, the Employment Relations Amendment Act 2026 introduced a gateway test that can confirm a worker's status as a "specified contractor" if all five criteria are met.
• If any one of the five gateway criteria isn't met, the traditional common law test applies, and the worker could challenge their classification.
• Getting classification wrong can lead to back-payments for leave, KiwiSaver, Accident Compensation Corporation (ACC) levies, and penalties from Inland Revenue (IRD).
• You can reduce your risk by reviewing every contractor arrangement against the five gateway criteria and keeping clear, written agreements in place.

What is the difference between a contractor and an employee in NZ?

An employee works under an employment agreement and is part of your business. A contractor works under a contract for services and runs their own business independently of yours.

The distinction matters because employees get legal protections that contractors don't, including minimum wage, paid leave, KiwiSaver contributions, and the right to raise a personal grievance. If you classify a worker as a contractor when they're actually an employee, you could face significant financial and legal consequences.

In New Zealand, it's the real nature of the working relationship that determines status, not just what you call it in a contract. This is known as the "substance over form" principle. Even if a written agreement says "independent contractor," the law looks at how the arrangement actually works in practice.

What is the gateway test?

The gateway test is a new set of five criteria introduced by the Employment Relations Amendment Act 2026, which came into force on 21 February 2026. If a worker meets all five criteria, they're classified as a "specified contractor" and can't challenge their status as a contractor under employment law.

The test gives you a clearer path to confirm that your contractor arrangements are legitimate. Before this law, every contractor relationship was assessed using the common law test, which weighs up multiple factors with no single deciding criterion. The gateway test provides more certainty.

The gateway test isn't retrospective, so it doesn't rewrite past arrangements. However, if your existing contractor arrangements already meet all five criteria, they're covered by the new rules going forward.

The 5 criteria of the gateway test

To qualify as a specified contractor, a worker must meet all five of these criteria. If even one isn't met, the gateway test doesn't apply and the common law test is used instead.

A written agreement stating the worker is a contractor

You and the contractor must have a written agreement that states the person is an independent contractor or is not an employee. A verbal agreement or handshake deal won't cut it. The contract should clearly outline the scope of work, payment terms, and the nature of the relationship.

The contractor can work for others

The agreement can't restrict the contractor from taking on work for other clients. If your contract says they can only work for you, or if the hours you assign in effect prevent them from working elsewhere, this criterion won't be met.

For example, a web developer who builds sites for several businesses at the same time would likely meet this criterion. A worker who's expected to be available exclusively for your business, five days a week, probably wouldn't.

Flexibility around the work, or the ability to sub-contract

Either there's no requirement for the contractor to perform work at a specified time, day, or for a minimum period, or the contractor has the ability to sub-contract the work to someone else. Only one of these two conditions needs to be met for this criterion to be satisfied.

For example, a contractor who sets their own schedule and delivers completed work by an agreed deadline would meet this criterion. So would a contractor who can hire someone else to carry out the work on their behalf, even if they have set working hours.

No termination for refusing additional work

You can't have the ability to terminate the arrangement simply because the contractor declines additional work beyond what was originally agreed. If turning down extra tasks puts the whole contract at risk, this criterion isn't met.In practice, this means the contractor should be able to say no to work outside the agreed scope without fear of losing the engagement.

A reasonable opportunity to seek independent advice

The contractor must have been given a reasonable opportunity to seek independent advice before signing the agreement. This ensures the contractor entered the arrangement with a clear understanding of their rights and obligations, rather than being pressured into signing on the spot.

What happens if a worker doesn't pass the gateway test?

If any one of the five criteria isn't met, the worker doesn't qualify as a specified contractor. That doesn't automatically mean they're an employee, but it does mean their status isn't protected by the gateway test.

Instead, the traditional common law test applies. This is the same test that was used before the 2026 amendment, and it looks at the overall nature of the relationship across several factors. The worker can also bring a claim to the Employment Relations Authority (ERA) arguing they've been misclassified.

If the ERA finds the worker is actually an employee, you could be liable for back-payments of minimum wage, holiday pay, KiwiSaver, and other entitlements. That's why it's important to check your arrangements carefully rather than assuming they'll hold up.

The common law test and how it still applies

The common law test hasn't gone away. It still applies to every worker who doesn't pass the gateway test, and it's been used in New Zealand courts for decades. Unlike the gateway test, there's no single checklist. Instead, the ERA weighs up a range of factors to determine the true nature of the relationship.

The main factors considered include:

• Control: How much control do you have over how, when, and where the work is done? The more control you exercise, the more it looks like employment.
• Integration: Is the worker integrated into your business, or do they operate independently? Someone who uses your email address, attends your team meetings, and reports to a manager is more likely to be considered an employee.
• Economic reality: Does the worker bear their own financial risk? A contractor typically invoices for work, manages their own cash flow, and can make a profit or a loss. An employee receives a regular wage or salary regardless of business performance.
• Tools and equipment: Does the worker provide their own tools, equipment, and materials? Contractors usually supply their own, while employees use what the business provides.
• Ability to sub-contract: Can the worker delegate or sub-contract their tasks to someone else? This overlaps with the gateway test but is also considered under common law.
• Intention of the parties: What did both parties intend when they entered the arrangement? While intention matters, it carries less weight than the practical reality of how the relationship works day to day.

No single factor is decisive. The ERA looks at the overall picture and decides which way the balance tips.

Key differences between contractors and employees

Here's a summary of the main differences between how you manage contractors and employees in your business:

• Annual leave: Employees are entitled to at least four weeks' paid annual leave. Contractors aren't entitled to any paid leave from you.
• Sick leave: Employees get 10 days' paid sick leave per year after six months. Contractors manage their own sick days.
• Tax: You deduct pay-as-you-earn (PAYE) tax from employee wages and pay it to the Inland Revenue Department (IRD). Contractors handle their own tax obligations, including provisional tax and income tax returns.
• ACC levies: You pay the employer ACC levy for employees. Contractors pay their own ACC levies directly.
• KiwiSaver: You must contribute to KiwiSaver for eligible employees (at least 3.5% of gross pay). There's no KiwiSaver obligation for contractors.
• Minimum wage: Employees must be paid at least the minimum wage. Minimum wage rules don't apply to genuine contractors.
• Personal grievance rights: Employees can raise a personal grievance for issues like unjustified dismissal. Contractors don't have personal grievance rights.
• Notice periods: Employment agreements typically include notice periods. Contractor agreements are governed by the terms of the contract, which may or may not include notice provisions.
• GST: If a contractor earns over $60,000 a year, they must register for and charge GST. Employees don't charge GST on their wages.

Tax and payroll obligations: Contractor vs employee

Your tax and payroll responsibilities differ significantly depending on whether a worker is an employee or a contractor.

Here are your tax and payroll responsibilities for employees:

• PAYE: You deduct pay-as-you-earn tax from each pay and filing it with IRD.
• ACC levies: You pay the employer portion of ACC levies based on your industry risk and employee earnings.
• KiwiSaver: You make employer contributions (minimum 3.5%) for eligible employees and deduct their employee contributions from each pay.
• Record-keeping: You maintain accurate payroll records, including hours worked, pay rates, leave balances, and tax deductions.

For contractors, your obligations are simpler. You pay them the agreed amount for the work completed, usually on invoice. You don't deduct PAYE (unless they don't provide a valid IRD number, in which case you may need to apply withholding tax). You don't make KiwiSaver contributions, and you don't pay ACC levies on their behalf.

Contractors who are GST-registered will add GST to their invoices, which you can claim back as an input tax credit if you're GST-registered yourself. Keep records of all contractor invoices and payments for your own tax returns and in case IRD asks questions about the arrangement.

Risks of getting worker classification wrong

Misclassifying an employee as a contractor can be costly. Here's what you could face if a worker's status is challenged and they're found to be an employee:

• Back-payment of entitlements: You may owe unpaid minimum wage, holiday pay, sick leave, public holiday pay, and KiwiSaver contributions for the entire period of misclassification.
• ACC penalties: ACC can recover unpaid employer levies, plus interest and penalties.
• IRD penalties: IRD can impose penalties for failing to deduct and pay PAYE, along with use-of-money interest on the unpaid amounts.
• ERA claims: The worker can bring a personal grievance claim to the Employment Relations Authority. If the ERA finds in their favour, you may need to pay remedies including lost wages and compensation for hurt and humiliation.
• Reputational risk: Employment disputes can become public and damage your business's reputation, making it harder to attract good workers in the future.

The financial impact can be significant, especially if the arrangement has been in place for a long time. It's far less expensive to get classification right from the start than to sort it out later.

How to classify your workers with a practical checklist

Use these five steps to work through the classification process for each worker in your business.

1. Review the written agreement. Check that you have a signed, written contract in place. Make sure it accurately reflects the actual working arrangement, not just the label you've given it.
2. Apply the gateway test. Go through all five criteria one by one. Can the worker work for others? Is there flexibility around when and how the work is done, or can they sub-contract? Can you not terminate the arrangement just because they decline extra work? Were they given a chance to seek independent advice? If the answer is yes to all five, the worker qualifies as a specified contractor.
3. If the gateway test isn't met, apply the common law test. Assess the level of control you have, how integrated the worker is in your business, who bears the financial risk, who provides tools and equipment, and what both parties intended when the arrangement started.
4. Get professional advice if you're unsure. If the answer isn't clear after steps two and three, talk to an employment lawyer or your accountant. The cost of advice upfront is far less than the cost of getting it wrong.
5. Document everything. Keep copies of all contracts, correspondence, invoices, and any records that show how the arrangement works in practice. Good documentation protects you if a worker's status is ever challenged.

Simplify contractor and employee management with Xero

Whether you're running payroll for employees or paying contractors on invoice, keeping track of your obligations doesn't have to be complicated. Xero's payroll software helps you manage PAYE, KiwiSaver, and leave entitlements for your employees, while making it straightforward to track and pay contractor invoices in one place.

When your financial records are organised and up to date, it's easier to demonstrate that your worker arrangements match what's on paper. That can give you more confidence if IRD or the ERA ever asks questions.

Ready to simplify managing payroll and contractor payments? Get one month free.

FAQs on contractor vs employee classification in NZ

Here are answers to some common questions employers have about classifying workers in New Zealand.

Can a worker be both a contractor and an employee at the same time?

Yes, but only if the roles are genuinely separate. For example, someone could be employed part-time as an office administrator and also do independent graphic design work for you under a separate contract for services.

Does the gateway test apply to workers already engaged before 21 February 2026?

It applies from 21 February 2026 onwards, but if an existing arrangement already meets all five criteria, the worker qualifies as a specified contractor going forward. Review your current contracts against the five criteria to confirm their status under the new framework.

What should I do if a contractor asks to be reclassified as an employee?

Review the arrangement against the gateway test and common law factors. If the working relationship genuinely looks like employment, it's better to reclassify voluntarily than to wait for an ERA challenge. Seek legal advice if you're unsure.

Do I need to rewrite existing contractor agreements to comply with the new law?

You're not legally required to rewrite them, but it's a good idea to review your agreements and make sure they accurately reflect the actual working relationship. Updating contracts to address the five gateway criteria can give you stronger protection.

Can IRD decide if a contractor is actually an employee?

IRD can investigate your worker arrangements and determine that someone you've been treating as a contractor should have been classified as an employee. If that happens, you could owe back-payments of PAYE, KiwiSaver, and ACC levies, plus penalties and interest.

Is it riskier to engage contractors now that the gateway test exists?

Not necessarily. The gateway test actually gives you more certainty. If your arrangement meets all five criteria, you have stronger legal protection than before. The risk sits with arrangements that don't meet the criteria but haven't been assessed under the common law test.