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Labour hire services

If you’re a contractor working under a labour hire arrangement, tax must be deducted from all payments made to you by a labour hire business.

Labour hire arrangements

A labour hire arrangement is where a person is paid by a labour hire business to perform work or services directly for clients of the business or other person, instead of performing work or services for the business itself. The client will pay the labour hire business who will pay the worker.

The term “labour hire arrangement” differs from the more commonly known term “labour-only”.

Payments received under a labour hire arrangement

If you work under a labour hire arrangement and you’re not an employee working for salary or wages, it means you’re a contractor being paid schedular payments. Tax must be deducted from these payments, including payments made to companies.

If you’re a New Zealand tax resident and have a certificate of exemption, you can’t use this for any payments received under a labour hire arrangement. You’ll need to apply for a 0% special tax rate instead.

Payments to staff of a labour hire business are not payments under a labour hire arrangement.

Example: Payment from a labour hire business

Space Recruitment Co hire a contractor to clean their windows. They pay them directly to do this. As the window cleaning is performed directly for the labour hire business, the cleaner isn't being paid under a labour hire arrangement.

Certificate of exemption (COE)

If you have a valid COE and receive schedular payments under a labour hire arrangement, you can use your exemption from 1 April 2017 to the earlier of:

  • the expiry date, or
  • 31 March 2018.

After this date, if you want a 0% tax rate you’ll need to apply for a 0% special tax rate certificate.

Labour hire arrangement for a client of another entity

A labour hire arrangement can include situations where there are chains of labour hire businesses involved. For example, a labour hire business is unable to fulfil a contract it has so it may request the services of another labour hire business to provide extra workers. In this situation, tax must be deducted from the schedular payment made by:

  • the labour hire business to the other labour business, and
  • each labour hire business to its contractors.

Labour hire businesses

A labour hire business is a business where one of the main activities is arranging for a person to perform work or services directly for:

  • its clients, or
  • clients of another person.

A business can have more than one main activity. For an activity to be one of its main activities, it must be more than incidental to its other activities.

A labour hire business may also be known as:

  • an on-hire business
  • an employment agency
  • contract management, or
  • recruitment services.

If you’re a labour hire business paying contractors under a labour hire arrangement, you’ll need to register as an employer.

Example: Labour hire business

ITU Co provides workers to other businesses to help with their IT projects. Pacific Co needs three workers to help upgrade their IT system. They contact ITU Co who find three people to do the work. Pacific Co will pay ITU Co for the service and ITU Co pays the workers. As the main business activity for ITU Co is arranging a person to perform work or services directly for its clients, it's a labour hire business.

Example: Non-labour hire business

Ben is Jane's solicitor. Jane is engaged in litigation and requires a barrister to represent her in court. Ben instructs Tara and pays her on Jane's behalf to perform this service. Ben is arranging for a contractor (Tara) to provide work directly for his client Jane. However, this doesn't make Ben's business a labour hire business. The payment is incidental to his business of providing legal services.

Associated parties to labour hire businesses

A labour hire business making payments under a labour hire arrangement can choose not to deduct tax from these payments if the person they’re paying:

  • has at least a 25% voting interest or market value interest (if a market value circumstance exists) in the company, or
  • is a company with total voting interests or market value interests in the paying company of 50% or more.