One of the most significant changes in the Employment Relations Amendment Bill (ERAB) is the introduction of a new test for deciding when someone is truly a contractor. At the moment, the Employment Relations Authority or the Employment Court decide these cases under section 6 of the Act, by looking at the “real nature of the relationship.” That means the courts weigh up a wide mix of factors. While that test gives flexibility, it has also created uncertainty. A worker with “contractor” written on their agreement can still claim they were in fact an employee, opening the door to personal grievances and litigation.
The ERAB tries to remove some of that uncertainty by creating a “gateway test.” If a working arrangement meets all five limbs of this test, then the person will be conclusively treated as a contractor. There is no room to argue otherwise. But the gateway is strict: miss even one of the limbs, and the current section 6 test continues to apply.
So, what are those limbs?
- Written agreement: The contract must be in writing and must clearly state that the person is an independent contractor.
- Freedom to work elsewhere: The contactor must be free to do work for other clients, apart from the period they are actually carrying out work for the business.
- Flexibility or subcontracting:
- need to have complete flexibility in when and how they work,
- or the right to subcontract the job to someone else.
- No penalty for declining work: The arrangement cannot be terminated just because the contractor turns down extra work.
- Independent advice: The worker must have had a real opportunity to get independent advice on the terms of the agreement before signing.
At first glance, the gateway looks like a win for certainty. But in practice, it may be harder to satisfy than it seems. Many contractor models still place limits on subcontracting, set expected hours, or discourage outside work, which means they won’t qualify. Equally, businesses will need to take real care with onboarding as there are many ways (such as during a rushed meeting without the chance to seek advice) for the gateway to collapse later, leaving the business back under the “real nature of relationship” test. And once that happens, the court may take even a dimmer view, treating the attempt to use the gateway as evidence of trying to avoid employee obligations.
For businesses that rely heavily on contractors, this is a moment to pause and take stock. Existing agreements will need to be reviewed closely. Some roles may need to be shifted into proper employment to avoid the risk of misclassification, while genuine contracting roles will need redrafting to meet the new criteria. Just as importantly, operational practice must align with what the contract says: it won’t help to have the perfectly worded agreement if, in reality, the contractor is expected to follow rosters, decline competitors, or work fixed hours.
Businesses that take time now to work out which roles can realistically meet the gateway test, and which are better treated as employment, will be in the strongest position to manage risk. With the Bill having passed its first reading and now sitting with the Education and Workforce Committee, there is still some way to go before it becomes law. The second and third readings are expected later in 2025, and if the Bill passes, businesses will have a 12-month transitional period to review their arrangements. That will provide some breathing space, but the groundwork is best started now!
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