From Redundancy to Contracting: The Gateway Test and the Rate You Need
Since 21 February 2026 the Employment Relations Act has a five limb test for a specified contractor, and an arrangement that passes it takes you outside every employment right in this pathway. This guide reads the test against the offer, lists what a contractor gives up, and rebuilds a salary as the hourly rate that leaves you no worse off.
The gateway test
Since 21 February 2026 the Employment Relations Act has a definition of a specified contractor, and a specified contractor is excluded from the definition of employee in section 6. The test is in section 6(7), and every limb must be met. First, the arrangement includes a written agreement that says you are an independent contractor or are not an employee. Second, you are not restricted from working for anyone else, except while actually doing the work for this client, and section 6(8) adds that hours which have the effect of restricting your ability to work for others fail this limb. Third, either you are not required to work or be available at a specified time, day or minimum period, or you are allowed to subcontract the work to someone else without the client vetting them beyond legal, qualification or criminal record checks.
Fourth, the arrangement cannot be terminated because you decline work that is additional to what you agreed to do. Fifth, you had a reasonable opportunity to seek independent advice before entering into it. If all five are met, the arrangement is a contract for services and you cannot later ask the Employment Relations Authority to find you were really an employee. If any limb fails, the older test of the real nature of the relationship still applies, and a contractor who works the same desk, the same hours, for one client, under direction, can still be found to be an employee.
Read the test against the offer, not the title on it. An agreement that names you a contractor but requires you at your old desk from nine to five, five days a week, for this client only, fails the second and third limbs on its face. A transitional rule in Schedule 1AA clause 27 also applies the test to arrangements entered into before 21 February 2026 where no proceedings had been brought by then. The point of the test, for someone leaving a restructure, is that it decides which set of rights you have, and the next section is the list of the ones you give up.
Whether a particular arrangement passes the five limbs is a legal question about its actual terms, and the fifth limb exists so that you take advice before signing. A union, an employment lawyer or a Community Law centre can read the agreement with you.
What you give up
Everything the Holidays Act and the Employment Relations Act attach to employment. Four weeks' annual leave, sick leave, public holidays and bereavement leave are paid to employees and priced into a contractor's rate or not at all. The employer KiwiSaver contribution, 3.5 percent of gross pay from 1 April 2026, stops. The ACC levies that were the employer's become yours. Redundancy compensation next time, notice periods, and the personal grievance procedure, including the 90 day window, do not apply to a specified contractor. Neither does the consultation obligation in section 4 that the first guide in this series is built around.
Some of it is not a loss so much as a transfer. A contractor pays ACC levies directly and is covered by ACC; a contractor can and should hold income protection; a contractor can claim expenses an employee cannot. But the transfer has to be priced, and the most common mistake on leaving a restructure is to accept an hourly rate that looks generous against the old salary divided by 2,080 hours, without pricing the hours that were paid but not worked.
If you hold an Accredited Employer Work Visa, contracting is usually not open to you at all: the visa allows work only in the job, for the employer and in the location on it, and a contract for services is not that job. The visa guide in this series covers what is.
| Employee | Specified contractor |
|---|---|
| Four weeks' annual leave, sick leave, public holidays, paid | Unpaid; priced into the rate or absorbed |
| Employer KiwiSaver contribution of 3.5 percent | None; any saving is from the rate |
| ACC levies partly paid by the employer | All ACC levies paid by the contractor |
| Notice, consultation, redundancy under the agreement | Whatever the contract says, and often nothing |
| Personal grievance within 90 days | Not available if the five limbs are met |
| PAYE deducted by the employer | Provisional tax, or withholding tax on schedular payments |
The rate
The arithmetic below rebuilds an $85,000 salary as an hourly rate that leaves the contractor no worse off, using the same items the employer was paying for. Employer KiwiSaver is added at 3.5 percent. The paid weeks that will no longer be paid, four weeks' annual leave, about twelve public holidays and five sick days, come out of the year, leaving the billable weeks. Then a gap between contracts is priced, because a contractor's year has one. The calculator paired with this guide does this with your own figures and adds the ACC levies and expenses.
Then check the offer against the day rate, not the salary. Employers making the same offer to several people leaving a round tend to quote an hourly rate that rounds up the old salary and looks like a rise; on these figures it is a cut once the leave and the gaps are priced. The charge-out rate and true cost of an employee calculators in the related links show the same arithmetic from the employer's side, which is a useful thing to have read before the negotiation.
Setting up
Tax is the first change. A contractor's income is not PAYE income unless the client deducts withholding tax on schedular payments, which applies to some kinds of work and not others. Otherwise you pay provisional tax, and in the first year there may be nothing to pay until the return is filed, which is the trap: the tax on a full year of contracting income arrives as one bill after the year ends, with provisional tax for the next year due alongside it. Put aside a share of every invoice from the first one.
GST registration is required once turnover passes the threshold in the Goods and Services Tax Act, and can be voluntary below it. Registering means adding GST to invoices and filing returns; it also means the client's accounts payable process, which usually asks for a GST number and an invoice that meets the tax invoice requirements. Ask the client what it needs before the first invoice, so the first payment is not delayed by a form.
The redundancy payment is the float. Its after-tax value, worked out under the extra pay method in the employment settlements guide in this series, is the money that covers the first weeks of invoices before they are paid, the tax to set aside, and the first gap between contracts. Treat it as working capital, not as income, and the first year is survivable.
Before you sign
Read the five limbs against the agreement, price the rate against the day rate rather than the salary, set aside tax from the first invoice, and keep the redundancy payment as the float. Then take the advice that the fifth limb of the test assumes you have taken.
Related guides and tools
- Contractor vs Employee Calculator, the rate that matches a salary once leave, ACC and the gaps are priced
- Charge-Out Rate Calculator, the same arithmetic from the side of the person setting the rate
- True Cost of an Employee Calculator, what the employer was paying beyond the salary, which is what the rate has to replace
- Employment Settlements and Tax, the after-tax value of the payment that becomes the float
- Redundancy on a Work Visa, why contracting is usually closed to AEWV holders
Test Your Knowledge
Ten questions on the specified contractor test, what a contractor gives up, the rate that matches a salary, and the tax set-up in the first year.
Sources: Employment Relations Act 2000 section 6(7) and (8) and Schedule 1AA Part 9 clause 27, as inserted by the Employment Relations Amendment Act 2026 (2026 No 4), read on legislation.govt.nz 3 September 2026; Inland Revenue, calculate PAYE for a lump sum payment, read 3 September 2026; Immigration New Zealand, Accredited Employer Work Visa conditions, read 3 September 2026; public/paye-data.php for the ACC earners' levy and KiwiSaver employer rate from 1 April 2026.