If you are a head contractor, it is likely that you will engage someone else to perform a specific part of the work that you have been hired to complete. This often occurs in the construction world, but may occur in other areas too.  In this article, we highlight the differences between employees and contractors. We also outline issues to consider if you are a head contractor who engages the services of other people. These people may be employees or contractors and it is important to clarify the distinction so that you give them the correct entitlements.

What is an Employee?

An employee is an individual engaged by your business on a casual, part-time, or full-time basis. In addition, employees receive entitlements set by Australia’s workplace laws.

Employees also work under the guidance and direction of their employer. They are generally required to work standard hours. For example, the business’s regular working hours may be 9 am to 5 pm on Monday to Friday.

What is a Contractor?

In contrast, a contractor is a separate business entity who provides your business with a service. It may be:

  • a one-off service;
  • for a fixed amount of time; or
  • for an agreed amount of money.

However, a relationship with a contractor usually involves typical business processes. This can include:

  • payment requirements;
  • fees; and
  • invoicing for the work or projects that they complete.

While employees work under the direction of their employer, contractors have more control over how they carry out their work. Also, a contractor’s working hours will usually revolve around the task that the contractor is enlisted to complete.

Differentiating Between Employees and Contractors

While the distinction between employees and contractors seems clear, this may not always be the case. In some situations, it can be difficult to determine whether the individuals you are engaging are employees or contractors.

Further, you cannot use the terms ’employee’ and ‘contractor’ interchangeably and the requirements for each are vastly different. Some of the primary areas in which the two differ include:

  1. the period of engagement;
  2. payment amounts and terms;
  3. entitlements and expectation that tools and materials will be provided;
  4. liability for work completed; and
  5. the types of employment contracts.

Key Differences Between Employees and Contractors

The table below summarises the key differences between employees and contractors in each of the above areas:

Employee Contractor
Period of Engagement Firstly, depending on the type of employment, an employee is employed on a permanent or fixed term basis.    Conversely, a contractor is usually engaged:

  • for a specific period; or
  • up until they complete the assigned work.
Payment

The Fair Work Act 2009 (Cth) outlines the minimum amounts employees should be paid.

Payment usually occurs on a recurring basis: weekly, fortnightly, or monthly. Payment also includes superannuation contributions.

A contractor is a business in its own right, and will therefore determine its fees and charges to maintain a commercially viable business.

Before the contract commences, payment terms are decided upon. Payment is often made when a project or element of a project is complete.

Entitlements Employees have several entitlements, including:

  • pay;
  • leave;
  • superannuation contributions;
  • tax; and
  • a safe workplace.

Additionally, an employer will supply the tools or equipment required to complete the work.

Specific entitlements afforded to contractors are outlined in the contractor agreement. Usually, contractors will pay their own: 

  • tax;
  • GST; and
  • superannuation contributions.

Furthermore, contractors will generally supply their own tools or equipment.

Liability Overall, the employer is responsible for the work that their employees complete.

In contrast, the head contractor will try to pass on most of the responsibility to their subcontractor.

Consequently, the contractor will be responsible for the work’s quality and timeliness.

Contract Finally, the employee will need an employment agreement which includes terms about the:

  • role;
  • type of employment; and
  • employee entitlements.

 

While employees require employment agreements, contractors need subcontractor agreements or back-to-back agreements.

The chosen agreement will depend on:

  • the relationship; and
  • how much risk the head contractor wants to pass on to their subcontractor.

Key Takeaways

In order to ensure that you fulfil obligations to your employees and contractors, it is imperative that you know how to differentiate between the two. The key areas of difference between employees and contractors include:

  1. the period of engagement;
  2. payment amounts and terms;
  3. entitlements and expectation that tools and materials will be provided;
  4. liability for work completed; and
  5. the types of employment contracts.

Therefore, if you have any questions about the distinction between employees or contractors, contact LegalVision’s employment lawyers on 1300 544 755 or fill out the form on this page.

Jessica Anderson
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