As an employer, it is important that you understand the differences between an employee and a contractor. This is because your legal obligations as an employer will differ depending on whether you employ someone as an employee or contractor. Put simply, an employee works in a business and is part of that business. On the other hand, a contractor runs their own business, has an Australian business number (ABN) and provides services to other businesses.
Importantly, you cannot simply designate an employee as a “contractor” to avoid your legal obligations associated with hiring an employee. After all, the Australian Taxation Office (ATO) can rule that someone characterised as a “contractor” is actually an employee. This applies even if the employer did not intend to hire the employee but rather sought to set up a contracting arrangement.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
Let us explore the six fundamental differences between employees and contractors.
1. Delegating and Sub-contracting Work
An employee cannot delegate or subcontract their work. Nor can an employee pay a third party to perform their job. Instead, you retain an employee to complete the work you assign them.
On the other hand, a contractor can delegate their work to another person. Similarly, a contractor can subcontract their work by paying a third party to perform it. In this sense, contractors have the freedom to negotiate the price and terms of their services. Meanwhile, employees work according to your direction.
2. Payment
Since employees work according to your direction, they must receive certain entitlements. This includes a salary, hourly rate, or commission for the work they complete. Whether you hire your employees on a full-time, part-time or casual basis, they might also be entitled to other benefits such as annual and long service leave. You can find these benefits in the relevant award, enterprise agreement, and National Employment Standards.
On the other hand, you pay a contractor upon completing the task you retained them for.
Unlike employees, contractors are responsible for their taxation and superannuation obligations. This means you do not have to deduct the relevant amounts from any payments you make to contractors.
Continue reading this article below the form3. Equipment
A business provides most, if not all, equipment for its employees. If an employee purchases equipment, you should reimburse them for the cost of the equipment.
Alternatively, a contractor supplies most, if not all, of the equipment required to complete their work. On this basis, you are generally not required to reimburse a contractor for the cost of the equipment.
4. Risk
When you hire an employee, they take little to no commercial risk for your business. Instead, you are legally responsible for the acts of your employees. Unfortunately, this also means that you bear the costs of rectifying any mistakes your employees make in the workplace.
On the other hand, a contractor takes commercial risks for the work they complete. In this sense, a contractor is legally responsible for their work.
5. Control Over Work
As mentioned above, an employer has the right to direct its employees concerning the work they perform. Alternatively, a contractor has the freedom to perform work subject to the terms of any contract.
6. Independence
An employee does not work independently of their employer. Instead, their work is part of your business. On the other hand, a contractor is operating their own independent business. This means that they can accept or refuse to perform additional work subject to what you have agreed to in the contract.
Above all, these six factors are not determinative of whether a person is an employee or contractor. That is to say, a court or tribunal will look at the full picture to determine the type of relationship that exists. On this basis, a court or tribunal will take a ‘multi-factor’ approach to determine the status of the relationship.
Key Takeaways
Before you ask someone to perform tasks for your business, you must decide whether you want to hire an employee or contractor. Ultimately, your obligations as an employer will differ depending on whether you hire an employee or a contractor.
If you have any questions about the differences between an employee and a contractor, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
The NES outline eleven minimum standards of employment for all workers covered by the national workplace relations system. The standards range from maximum weekly work hours to annual leave entitlements.
Unlike an employee, you generally do not have to make superannuation contributions for an independent contractor. Instead, the contractor is responsible for making their contributions.
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