Employee or Independent Contractor?

A person’s employment status depends on whether his or her employment contract is a “contract of service” or a “contract for services” Employees have a “contract of service” with their employer.
Contracts of service evolved from the earlier concept of a master-servant relationship. Such a relationship required an employee to be continuously available for service and to accept a high degree of control by the employer.

 

A “contract for services” applies to the relationship between an independent contractor and a principal. It emphasises the nature of the services is provided by a person rather than his or her availability to work as directed.

 

Either form of contract may include an unwritten agreement. A written contract is not necessary for determining the existence of any particular type of employment relationship. However, if there is a detailed written contract, it will form the basis for analysing the nature of the relationship the parties intended to have. Employment contracts often change as the relationship evolves (e.g. A person takes on more duties). Changes in regulations and work practices may also cause the employment status of some workers to change. The courts will consider how the parties actually work together when they determine the type of employment relationship the parties have.

 

Tax law relies on the terms “contract of service” and “contract for Services”, but does not define them.

 

A person will have the same employment status for tax purposes as he or she has under the general law. Sometimes it is not easy to tell if a taxpayer is an employee or an independent contractor. Inland Revenue will use the current common law test to determine a worker’s status.

 

It is essential to determine the correct employment status. The employer has an obligation to deduct PAYE where the worker is considered an employee. In certain cases withholding tax is also required to be deducted where the worker is determined to be a contractor.

 

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