The legal obligations of an employer differ depending on whether they employ someone as an employee or contractor. An employee works in a business and is part of that business, whereas a contractor runs their own business, has an Australian business number (ABN) and provides services to other businesses.
An employer has a legal obligation to withhold pay as you go (PAYG) tax from payments made to an employee and to make compulsory superannuation guarantee contributions to an employee’s nominated superannuation fund. Contractors are, however, responsible for their own taxation and superannuation obligations and an employer is not required to deduct the relevant amounts from any payments made to contractors.
Importantly, an employer cannot simply designate an individual working for it as a “contractor” in order to avoid the legal obligations associated with hiring an employee. The Australian Taxation Office (ATO) can rule that someone characterised as a “contractor” is actually an employee, even if the employer did not intend to hire the employee but rather sought to set up a contracting arrangement.
The six basic differences between employees and contractors are set out below:
Delegation / sub-contracting
- An employee cannot delegate or sub-contract their work and/or pay a third party to perform their work.
- A contractor can delegate or sub-contract their work and pay a third party to perform their work.
Payment
- An employee is paid a salary, hourly rate and/or commission.
- A contractor is paid based on a result achieved (e.g. completion of a task).
Equipment
- A business provides most, if not all, of the equipment for use by its employees. If an employee purchases equipment then the employer generally reimburses the employee for the cost of the equipment.
- A contractor supplies most, if not all, of their own equipment required to complete their work and is not reimbursed for the cost of the equipment.
Risk
- An employee takes no commercial risks and the employer is legally responsible for the acts of its employees.
- A contractor takes commercial risks and is legally responsible for their work.
Control over work
- An employer has the right to direct its employees in relation to the work that they perform.
- A contractor has freedom in performing work, subject to the terms of any contract.
Independence
- An employee does not work independently of his or her employer, their work is part of the employer’s business.
- A contractor is operating their own independent business, may accept or refuse to perform additional work (subject to contract) and may contract with third parties.
These factors are not determinative and the circumstances of each relationship must be carefully considered to determine the type of relationship that exists.
Conclusion
Before you ask someone to perform tasks for your business it is therefore important that you decide whether you want to hire an employee or contractor. If you choose to contract out you must ensure your relationship with the contractor does not have the characteristics of an employee/employer relationship. For guidance regarding employment of staff, contact one of our Contract Lawyers on 1300 544 755 to get expert advice.