Whether to hire workers as an employee or contractor is a commercial decision. Whatever decision you make, you’ll need to ensure that the relationship is clear cut. If the lines are blurred your business may:
- risk impeding the rights of a worker; and
- fail to meet your business’ tax and superannuation obligations.
To understand those rights and obligations, you need to understand the difference between an employee and a contractor.
What’s the difference?
There are many indicators, when considered together, that differentiate an employment relationship and a contractual arrangement. Businesses must assess the whole working arrangement to determine whether the worker is an employee or contractor. Below are a number of indicators that can be of assistance.
Employee: the worker is paid for time worked, a price per item or activity or commission.
Contractor: the work is paid for a result achieved based on the quote provided. The worker’s hourly rates or price per item make up the total cost of the quote for the work.
Equipment and tools
Employee: your business provides all or most of the equipment and tools required to complete the work or your business provides them with an allowance or reimburses the worker for the costs of acquiring the equipment and tools.
Contractor: the worker provides all or most of the equipment and tools required to complete the work. The worker does not receive an allowance and is not reimbursed for the costs of the equipment or tools.
Employee: the worker works within and is considered part of your business.
Contractor: the worker runs its own business and sells its services to your business.
Control over the work
Employee: your business has the right to direct how, where and when the worker is to perform the work.
Contractor: the worker controls how the work is performed, subject to the terms of the contractor’s agreement.
Expectation of continuous work
Employee: the worker has an ongoing expectation of work (casual employees and workers engaged for a specific task/period are excepted).
Contractor: the work is typically engaged for a specific task.
Employee: the worker is entitled to receive paid leave entitlements such as annual leave, personal/carers’ leave (except for casual employees).
Contractors: the worker does not receive paid leave.
Employee: the worker must perform the work themselves (cannot pay someone else to do the work).
Contractor: the worker can subcontract/delegate the work and pay someone else to do it for them, this may depend on the terms of their contract with you.
Financial responsibility and risk
Employee: the worker bears no financial risk – the risk lies with the employer.
Contractor: the work bears the risk for making a profit or loss on each task. The worker is usually personally responsible and liable for poor work or any injury sustained while performing the task.
Employee: the worker’s income tax is deducted by their employer.
Contractor: the worker pays their own tax and GST to the ATO.
Employee: the worker is entitled to superannuation guarantee contribution by their employer.
Contractor: the worker pays their own superannuation (with some exceptions).
Treating an employee as a contractor is against the law.
Businesses need to fully understand their working arrangements to meet their legal obligations. Get it wrong, penalties may apply.
If you require assistance with reviewing work arrangements or understanding your employment law obligations talk to us, we’re here to help.
Our business is protecting yours.