The tech Industry is full of contractors. Those that contract typically have many years of experience behind them and a solid personal network helping to ensure the next contract is lined up in advance. They get to charge a lot as contractors and this is for several reasons: First they have no job security and the client has no long term employment responsibility. Second they have experience the client wants and that experience may be hard to find. Third they have expenses and liabilities arising from being a business providing a service.
Students do not have the experience that tech contractors typically have and do not typically have the knowledge to avoid the hidden pitfalls of contracting --- pitfalls that are avoided in Employment Contracts. This is compounded by students not able to charge as much for contracting (lack of experience) and often being reluctant to pay for the professional advice they need as people in business.
For these reasons and more, we do not recommend students undertake contracting work for work experience. The remainder of this article is long(ish), in large part because the topic is complex and the target audience is tech students with typically little to no experience in contract law, tax law, etc. This is not
legal advice as neither the author nor the university is qualified or in a position to provide the tailored professional advice you need.
Why do businesses contract work out?
Typically the drive is to get a specific piece of work completed in an environment where the skill is not present or is already busy.
The business may prefer contracting to avoid employing someone because they do not need them long term. However this can typically be arranged through a fixed term employment contract which provides a lot more protection for the "contractor" (and employer) by virtue of being an employee for the duration. Cost is typically not the issue as contractors are more expensive than employees even after allowing for hidden costs of employees (a workplace, supervision, training, equipment, social events, Kiwi Saver, ACC levies, etc).
Sometimes contractors are used as a risk mitigation strategy, where risk is off-loaded onto the contractor. For example, accidentally breaching copyright, a patent or data privacy for a European citizen may mean substantial liabilities that might be passed on to a contractor. In effect contractors are short term and disposable, in contrast employees are a long term investment in the client's business success.
So you still want to be a contractor
All contractors need a small team of professionals to support them. All businesses already have this team and in effect you are setting yourself up in business.
– all contracting involves contracts. All contracts are written up when the parties are friendly, the legally astute party recognizes they will interpreted by the courts when the parties are not so friendly. Your Client will be writing up the contract with this in mind. You need your lawyers advice on what this contract looks like if the relationship fails and to hear the worst case scenarios that a lawyer will highlight.
Lawyers will also advise you on the legal structure to adopt when contracting (limited liability company, your personal name, trust, etc). There is no one answer to this, it depends on your personal situation.
If there are several of you collaborating on a contract, your lawyer will ask several what if questions. For example, what if one of you gets offered a job at Google and leaves. Is s/he still legally liable for the performance of that contract? (likely yes and potentially to both the partners that could not complete without them and the client).
– around a quarter to a third of your contracting income will be paid to the IRD as tax. Accountants can legally reduce this. Don't go budget on your accountant or hire a dodgy one, use a Chartered Accountant if you can. On the plus side the IRD will often ignore students because students rarely have assets to take, however your goal is to accumulate assets and the IRD can and will go back in time if they take an interest and you have assets to seize. The IRD is very, very good at what they do.
Your accountant will also set you up with a budget to ensure you are not surprised by hidden costs like ACC levies and the double hit of income tax you must pay in your second year.
Think of your Accountant and Lawyer as vital parts of your business game. Your Lawyer keeps you up to speed on the rules, your accountant keeps track of your score and can advise on how to improve it. You are still the Captain, but being aware of the rules and how to score well is very important.
– less important when you start, but very important if you become a professional consultant. Banks do not like loaning to businesses (including consultants) and will typically ask for several years of accounts to prove your income is stable. For banks you being an employee is enough evidence that your future income is secure. Ironically as a contractor, you can employ someone and they will get a mortgage before you will. Your bank may be a source of planned funding to cover quiet periods (eg. Bank overdraft). The difference between planned funding and desperation (help - I can’t pay staff wages!) is foresight derived from budgeting.
– you need Professional Indemnity insurance. This insurance protects you if you make a mistake while working as a contractor. As an employee your employer has to wear any mistakes. As a contractor, your client can sue you for mistakes (don’t forget you need a lawyer). For example, you accidentally create a website that looks remarkably like one based in the US and they sue your client for plagiarism and copyright. Your clients insurer will manage this claim and pass on the costs of resolving it to you (or better, your insurer).
– Both the ITP and ENZ support members that undertake professional contracting. For example, both provide standard forms and processes useful to contractors and also provide a network of experienced peers to provide advice and if necessary to peer review your work to provide an independent assessment of its fitness for purpose.
Being an Employee is a lot easier
Especially as a student or recent graduate, being an employee is a lot easier and far less risky.
Contracting work for Work Experience
First check that the working arrangements align with the definition of Professional Work
. Keeping in mind that one popular reason to contract work out, is that there is no skill base in house. In effect this may mean the work will not be considered Professional Work.
To claim contracting work for work experience, you need to provide;
- your contract,
- a short written summary of the professional team you have and in broad terms, the advice received and
- a short discussion on how this work meets the requirements for Professional Work.
If the work does not meet the requirements for Professional Work, it may still be considered towards your first 400 hours of practical work.
You will accumulate hours after the contract is signed and will generate the “Work Finished” pdf at the end for both you and the client to sign to evidence the work.