Is a person an employee or independent contractor?
If you do not want to register as an employee and account for PAYE, the only option is for the employee to invoice the employer, plus GST if he/she is registered for GST.
However, you need to be sure that your situation can withstand the employee versus independent contractor test. If you ignore this test and IR decide later on that this person really is just an employee, the employer will be liable for any unpaid PAYE.
This is a very important issue for you to be clear on, as if the independent contractor status does not survive this test, not only will the employer be liable for unpaid PAYE, but you could even incur other costs such as unpaid holiday pay, sick and statutory leave, should an employment issue arise.
Real status of an employee
A number of matters are taken into account in deciding the real status of an employee, such as:
- The intention of the parties. Is there a written contract, for example?
- The control test – does the employer direct the work to be done?
- The fundamental test – is the employee in business on their own account? For example, does the worker provide their own equipment, hire his own staff, take some financial risk, have the ability to make a profit from good management?
- The integration test – is the employee “his own man”, or are they part of the organisation?
Generally speaking, a person will probably be treated as an employee if they have to do the work themselves, cannot employ someone else to do it, work set hours, have to work as directed, is not truly in control of their own business, has to follow the rules as set by the employer and works on the employer’s premises.
As there are a number of other issues you may need to consider, contact us and we will send you a more detailed report covering the subject.