If you use subbies, or if you work as a subcontractor yourself, there's a significant change you need to know about. On 21 February 2026, the Gateway Test became law in New Zealand. It's the first formal legislative test for determining whether a worker is a contractor or an employee — and it changes how disputes get resolved.
This matters directly to tradies. Misclassifying a worker — even accidentally — can leave a business on the hook for backdated PAYE, KiwiSaver, and ACC. Getting it right upfront is far cheaper than sorting it out later.
Why This Change Happened
Before the Gateway Test, whether someone was a contractor or employee came down to the "common law test" — a loose set of factors developed through court cases over decades. The problem was that this test was unpredictable. Two businesses with almost identical contractor arrangements could get different outcomes depending on which judge heard the case.
Workers in construction, trades, and contracting had been caught out repeatedly — classified as employees by the Employment Relations Authority even when both parties believed the contractor arrangement was genuine.
The Gateway Test was introduced to give clearer, objective criteria. If a contractor arrangement passes all the gateway criteria, the worker is a contractor. No further analysis required.
What the Gateway Test Says
The Gateway Test asks whether the worker genuinely has all three of the following:
1. The ability to work for others
The worker must be able to provide their services to other people or businesses — not just be locked in to one principal.
Note: they don't have to be working for others at the same time. A subcontractor who is fully booked on one job can still pass this test, as long as the contract doesn't prohibit them from taking other work.
2. Control over when and how they work, or the ability to subcontract
Either: - The worker can choose when they work and how they do the job, or - The worker can subcontract the work to someone else (i.e. send their own people)
This one often catches people out. If you're dictating exactly when and how a subcontractor works and they can't send anyone else in their place, you're starting to look like an employer.
3. The ability to decline additional work without the arrangement ending
If your subcontractor says "I can't do that job next week" and the answer is "fine, we'll find someone else," that's consistent with a genuine contractor relationship. If saying no means their contract gets cancelled, that's more like employment.
The Gateway Test Is Not Retrospective
This is important: the Gateway Test only applies from 21 February 2026 onwards.
For contractor arrangements that started before that date, you still use the old common law test for the period before February 2026.
From 21 February 2026, you can use the Gateway Test. If an arrangement fails the gateway (meaning the worker doesn't meet all three criteria), you fall back to the common law test to make a determination.
So passing the gateway is a safe harbour — fail the gateway and you're back to the uncertain common law analysis.
What This Means for Trade Businesses
If you use subbies
Go through your current contractor arrangements and ask the three questions honestly.
Common issue in trades: You've got a "subcontractor" who: - Works exclusively for you - You tell them exactly what hours to be on site - They can't send someone else to do the work - They'd lose the contract if they turned down a job
That arrangement fails the Gateway Test on at least two of the three criteria. IRD is likely to view it as employment — meaning you should be deducting PAYE, paying employer KiwiSaver contributions, and covering ACC levies.
What to do: If your current subbies look more like employees under this analysis, talk to an accountant or employment lawyer about how to regularise the arrangement. Converting someone to employment can feel like more admin, but it's cleaner than dealing with a backdated PAYE liability.
If you work as a subcontractor
The same test applies from the other side. If you're genuinely contracting — multiple clients, control over your hours, can send a worker in your place — the Gateway Test protects you.
If you're treated like an employee in practice (exclusive arrangement, directed hours, can't delegate), you may have grounds to claim employee status and the entitlements that come with it: paid leave, minimum wage protections, etc.
Use our Subcontractor Tax Calculator to estimate your tax obligations based on your contracting income.
The IRD Angle: Schedular Payments
Separate from the employee/contractor question, most subcontractors in the building trades receive schedular payments — and the payer must deduct withholding tax.
From April 2026, the standard schedular payment rate for most building and construction contractors is 20% (or 15% if the contractor elects a lower rate and provides a certificate).
This is different from the employment question. A genuine contractor can still be subject to schedular payments. The Gateway Test only determines whether someone is a contractor or employee — the schedular payment rules apply on top of that once contractor status is confirmed.
If you're paying subbies, you need to: 1. Confirm contractor status under the Gateway Test 2. Deduct the correct withholding rate from payments 3. File IR15 schedular payment returns with IRD
Genuine Contractor vs Employee: A Practical Checklist
| Factor | Points toward contractor | Points toward employee |
|---|---|---|
| Can work for multiple clients | ✅ | ❌ |
| Controls own hours | ✅ | ❌ |
| Provides own tools and equipment | ✅ | ❌ |
| Can subcontract/delegate work | ✅ | ❌ |
| Can decline jobs without penalty | ✅ | ❌ |
| Gets paid per job (not hourly/weekly) | ✅ | ❌ |
| Invoices for work | ✅ | ❌ |
| Works exclusively for one business | ❌ | ✅ |
| Directed by the business on how to work | ❌ | ✅ |
| On a regular roster | ❌ | ✅ |
If your subcontractor looks more like the right column, it's worth reviewing the arrangement.
What Happens If You Get It Wrong
IRD and the Employment Relations Authority take misclassification seriously. If a worker is found to be an employee when you've been treating them as a contractor:
- PAYE: You may owe backdated income tax that should have been deducted from wages
- KiwiSaver: Employer contributions (currently 3%) may be owing for the full period
- ACC: You may owe ACC employer levies
- Leave entitlements: The employee may be entitled to annual leave, sick leave, and public holidays going back to when the employment began
- Penalties: IRD can add shortfall penalties on top of the tax owing
None of this is pleasant. A proper review now costs an hour with an accountant. Getting it wrong and being caught costs significantly more.
Getting Set Up Properly
If you're running legitimate contractor arrangements, documenting them well helps if you ever face scrutiny. A good contracting agreement should:
- State clearly that the person is an independent contractor
- Confirm they can work for others
- Note that they are responsible for their own tax
- Specify payment per job or per task, not per hour worked
- Confirm they provide their own tools or equipment where relevant
Using proper job management software like Fergus or Tradify helps here — you can document work scopes, issue purchase orders to subbies, and keep clean records of what was agreed and paid.
Key Dates
- 21 February 2026: Gateway Test became law
- Arrangements before this date: Common law test still applies for the period before Feb 2026
- From 21 February 2026: Gateway Test applies; pass it and you have a contractor. Fail it and the common law test still determines the outcome.
Where to Get More Information
- Employment New Zealand: employment.govt.nz — plain-English guidance on the contractor vs employee distinction
- IRD: ird.govt.nz/roles/employees/self-employed-or-employee — tax obligations for both
- IRD Interpretation Guideline IG0009 — the detailed technical reference
- Subcontractor Tax Calculator — estimate your schedular payment obligations
If you're unsure about your specific situation, talk to an accountant or employment lawyer. The Gateway Test makes the analysis more straightforward, but individual arrangements can still have edge cases worth professional advice.
About NZ Tradie Tools: We build free calculators, guides, and resources for New Zealand tradies and the people who hire them. No signup, no cost — just useful tools. Visit tradietools.nz.