Upcoming changes to Employment Relations Amendment Bill: Contractor or Employee?

At a glance

• New Zealand plans to introduce a ‘Gateway Test’ under the Employment Relations Act to clarify the distinction between independent contractors and employees.
• The test includes four criteria: Meeting all criteria classifies a worker as an independent contractor; failing any reverts to existing multi-factor tests.
• This reform aims to prevent misclassification of workers, impacting industries heavily reliant on independent contractors.
• Businesses must review and possibly adjust their current contracting practices to comply with the new rules.

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The line between independent contractors and employees has long been a grey area for many businesses. As work models evolve and industries embrace more flexible arrangements, the distinction becomes critical for ensuring compliance with employment laws. The latest development, set to reshape this landscape in New Zealand, is the government’s signal to introduce a new 'Gateway Test' under the Employment Relations Act.

This reform, expected to be included in the Employment Relations Amendment Bill introduced next year, seeks to provide clearer guidelines for businesses to determine whether their workers should be classified as independent contractors or employees. Given the ramifications of misclassifying workers, this change is significant for all industries, especially sectors where independent contracting is prevalent.

What is the 'Gateway Test'?

Under the new rules, if a working arrangement meets all four criteria in the test, the worker will be deemed an independent contractor. Failing to meet one or more of these criteria will revert the decision to the existing multi-factor tests that currently dominate New Zealand’s employment landscape.

The four criteria for the gateway test are as follows:

• Written agreement: There must be a written agreement between the business and the worker, explicitly stating that the worker is an independent contractor.
• Non-exclusive work: The business cannot restrict the worker from taking on work for other businesses, including competitors.
• Work flexibility: The business cannot impose specific working hours or days on the contractor. Alternatively, the worker must have the right to subcontract the work.
• Right to decline tasks: The business cannot terminate the contractor’s agreement if the contractor chooses not to accept an additional task or engagement.

While the concept of a structured test is promising, many businesses may still be left wondering about how each of these criteria will be assessed in practice. For example, what happens when a contractor has a long-standing relationship with a business that provides regular, ongoing work? Will that fall under this new test? These questions remain unanswered until more details are announced in 2025.

Practical implications for businesses

For businesses, the new gateway test may bring both clarity and complexity. On one hand, businesses with genuinely independent contractors will be able to confidently rely on these criteria to avoid potential disputes over employment status. On the other hand, businesses may need to re-examine their current contracting arrangements to ensure they align with the new requirements.

Industries that rely heavily on independent contractors, such as the technology sector (with freelancers) or the gig economy (like ride-sharing platforms), will need to scrutinise their agreements. For instance, many tech companies use contractors to fulfil short-term development projects. Under the new rules, businesses will need to ensure that the contractors can work for competitors and are not tied to specific working hours or locations.

A novel example comes from the hospitality industry, where chefs and wait staff are often hired on an ad-hoc basis. Many of these workers are labelled as independent contractors, despite being scheduled for specific shifts. With the introduction of the 'Gateway Test', businesses will need to reassess these arrangements to avoid reclassification as employees, which would trigger significant obligations under employment law, including entitlements to leave and wage protections.

International context

The introduction of the 'Gateway Test' in New Zealand follows similar global trends aimed at clarifying the contractor-employee distinction. In recent years, jurisdictions such as the UK and California have introduced similar tests to address this sometimes-grey issue, particularly in relation to the treatment of tax and payroll.

As global markets increasingly converge in their approach to employment regulation, businesses with operations across borders will need to stay agile, ensuring compliance in multiple jurisdictions while adapting to local employment law changes.

For New Zealand businesses, as information emerges in 2025, they will need to be prepared to adjust their contracting practices where necessary.

Looking ahead: Practical steps

While the potential changes are still in development, businesses can use this period to ensure their practices are in line with current law, while remaining flexible enough to adapt to the future. Businesses can take several proactive steps:

• Audit existing contractor agreements: Begin reviewing current contracts to ensure they align with the 'Gateway Test’s' criteria. Look for clauses that could indicate control over hours, exclusivity, or availability that might need to be amended.
• Assess flexibility policies: Ensure that independent contractors are genuinely allowed to work for competitors and are not bound to specific hours or tasks that resemble those of employees.
• Seek legal guidance: Given the potential for ambiguity, obtaining legal advice can help mitigate risks. Lawyers can assist in drafting or reviewing agreements to ensure compliance with both the gateway test and existing employment law.

Having an early and informed view of how current practices align with the proposed new rules will not only help avoid disputes but also strengthen relationships with independent contractors by providing greater certainty and fairness.