Salary versus hourly pay in New Zealand is not just a preference question — each arrangement has different legal implications for leave, overtime, minimum wage compliance, and total compensation. Here’s how to compare them properly.
Salary gives stability and leave entitlements; hourly gives flexibility but requires careful comparison. The "contractor trap" is real: an hourly contractor rate that looks 25–30% higher than an employee equivalent often leaves you no better off once you add no KiwiSaver employer contribution, no sick leave, no annual leave, and no ACC employer levy. Always compare total compensation, not just the rate.
How Salary Works in NZ
A salaried employee receives a fixed amount per year, regardless of exact hours worked week to week (within reason). Under NZ employment law:
- Minimum wage compliance: The hourly equivalent of your salary must be at least the adult minimum wage ($23.50/hour). A $40,000 salary at 60 hours/week fails this test.
- Annual leave: 4 weeks (statutory minimum) paid at your ordinary rate. Sick leave: 10 days/year after 6 months.
- Overtime: Salaried employees often do not receive explicit overtime pay — it’s typically built in. Your employment agreement should specify expected hours.
- KiwiSaver: Employer contributes minimum 3% on top of salary.
How Hourly Pay Works in NZ
Hourly employees (including casuals) are paid for each hour worked. Key differences:
Permanent Hourly Employees
Same leave entitlements as salaried employees — 4 weeks annual leave, 10 days sick leave. Their annual leave is calculated on either their ordinary weekly pay or average weekly earnings over 12 months (whichever is higher).
Casual Hourly Employees
No guaranteed hours. Annual leave is paid as 8% of gross earnings (often added to each pay as “leave loading” or paid as a lump sum). No right to sick leave until they meet service thresholds.
| Entitlement | Salaried | Permanent Hourly | Casual Hourly |
|---|---|---|---|
| Annual leave | 4 weeks paid | 4 weeks paid | 8% of gross earnings |
| Sick leave | 10 days/year | 10 days/year | None (until thresholds met) |
| KiwiSaver employer | 3%+ | 3%+ | 3%+ |
| Overtime | Often no explicit OT pay | Depends on agreement | Time and a half on public holidays |
| Job security | High | Medium | Low |
The Contractor Trap
Many NZ workers are offered contracting arrangements (self-employed) at a higher hourly rate. The maths often looks attractive — until you account for what you’re giving up.
Worked Example: $60k Salary vs $38/hr Contractor
| Factor | $60,000 Salary | $38/hr Contractor (40hrs/week) |
|---|---|---|
| Gross income | $60,000 | $79,040 |
| KiwiSaver employer 3% | +$1,800 | $0 |
| Annual leave (4 weeks) | Included | $0 (must fund yourself) |
| Sick leave (10 days) | Included | $0 (must fund yourself) |
| ACC employer levy | Employer pays | Must pay self-employed ACC levy |
| GST compliance | None | If registered |
| Income tax treatment | PAYE (simple) | Provisional tax (set aside 25–28%) |
| Effective annual value | ~$68,000 | ~$64,000–$68,000 |
The $38/hr contractor rate — which sounds 30%+ higher than an equivalent $28.85/hr salaried worker — works out to a similar or lower effective value once you factor in lost entitlements.
Rule of thumb: As a contractor, your hourly rate should be at least 25–30% higher than an equivalent permanent employee rate just to break even on entitlements. Add more if you want to cover risk (downtime between contracts, self-funded professional development).
When Each Arrangement Is Better
Salary is better when:
- You want predictability and stability
- You work variable hours and don’t want to track them
- You want employer-funded leave and KiwiSaver contributions
- The role has strong career development and progression
Hourly/casual is better when:
- You have multiple income sources and want flexibility
- You want to work varied hours without a fixed schedule
- You’re supplementing a primary income
- The hourly rate genuinely compensates for lost entitlements (30%+ premium)
Contracting is better when:
- You have in-demand specialist skills with high market rates
- You can sustain income through multiple clients
- You understand and are comfortable with tax self-management
- Your net effective rate substantially exceeds employee equivalent after all costs
Minimum Wage Compliance Check for Salary
If you’re employed on salary and suspect your hourly rate may breach the minimum wage:
Formula: Annual salary ÷ actual hours worked per year = effective hourly rate
If this is below $23.50, your employer is in breach of the Minimum Wage Act. Contact Employment New Zealand or seek legal advice.