• As a business owner, your taxation, superannuation and employment obligations differ depending on whether your worker is an employee or contractor.
  • An employee works for a business, and a contractor works for themselves and holds their Australian Business Number (ABN).
  • There are varying obligations for business owners depending on whether a worker is an employee or contractor.

Difference Between an Employee and a Contractor

A person who enters into a contract of service is an employee and a person who enters into a contract for services is an independent contractor.

Even where a written contract states a relationship is not one of employment – this is not determinative. The distinction between employment and independent contracting is important as there are different statutory and common law obligations and consequences for business owners depending on how a worker is classified. For example, unfair dismissal terms do not apply to contractors, while you must pay superannuation contributions to employees.

Employees under the Fair Work Act 2009 (Cth) have an entitlement to various employment entitlements. This includes minimum wages and leave. On the other hand, contractors handle organising their taxation and superannuation. The Australian Tax Office and Fair Work Australia have the power to penalise a business if they classify their workers incorrectly.

Key Factors

There are a number of factors which determine whether an employment relationship or a contract for services relationship exists. This list is not exhaustive and no single issue is determinative. A court would generally look at the relationship as a whole and make a decision on balance of all the factors.

  • control over work – Does the worker have the discretion to choose the place and hours of work? An employer usually directs an employee and they have little control over their work. A contractor, on the other hand, may refuse to perform any additional work.
  • equipment – Is the provision and maintenance of tools and equipment the responsibility of the business? A contractor would likely supply and maintain any tools used in the performance of the contract, especially if expensive.
  • sub-contracting – The ability to delegate work to others will indicate an independent contract. An employee is normally not able to subcontract their role. A contractor, depending on his or her agreement, may do so.
  • income taxation deductions – does the hirer deduct taxation from the worker’s pay? This indicates employee status, with the employer needing to pay payroll tax.
  • remuneration – does the worker receive payment according to task completion, rather than receiving wages based on time they worked? Worker payment on submission of invoices will suggest an independent contract.
  • holidays and sick leave – Does the work receive paid holidays or sick leave? Or, is there a provision for the worker to determine holidays and sick leave?
  • business expenditure – Substantial expenditure by the worker, as a proportion of total income, can indicate an independent contractor.

Difference Between an Employment Contract and a Contractor’s Contract

An employment contract is an agreement between employer and employee and establishes the terms and conditions of the employment. It can be verbal or written. A contractor’s contract is an agreement between a company (the “principal”) and a service entity (the “contractor”).

Both agreements address different legal requirements of the employee or contractor relationship, including:

  • term and payment;
  • insurance, taxation, superannuation and reporting;
  • subcontracting, exclusivity and restraint and termination provisions.

Frequently Asked Questions about Employees and Contractors

Q: What happens when an employer disguises an employment relationship as an independent contracting arrangement?

A: This is known as sham contracting. This illegal practice is where a person working as an employee is told they are an independent contractor when they are not. The Fair Work Act 2009 can penalise an employer up to $51,000.

Q: Are apprentices and trainees employees or contractors?

A: Apprentices and Trainees are considered employees for tax and superannuation purposes. Employers are required to meet pay as you go withholding tax, superannuation and fringe benefits tax obligations.

Q: What happens if my contractor does not have an ABN?

A: If the contractor does not provide an ABN, the principal is required to withhold 46.5% of any payments and report these to the ATO. A contractor who is not registered for GST should not charge you GST.

Q: Do I need to pay my contractor superannuation?

A: Generally speaking, there is no requirement for you to pay your contractors superannuation. However, it’s important to note that there is an exception to this rule. If your contractor is wholly or principally paid for their labour services, they are entitled to super guarantee contributions just like employees. In the interest of avoiding penalties, it is important to consider whether your contractor falls into this bracket.
Fair Work Australia instructs that in determining whether your contractor is wholly or principally paid for their labour services, you must assess if they are:
– paid wholly or principally for their personal labour and skills;
– performing their services personally; and
– paid for hours worked, rather than to achieve a result.

Q: Who takes on more responsibility for their work?

A: Contractors take on the commercial risks of their work. They have legal responsibilities for their work and are liable to fix any issues in their work. Employees do not take on the commercial risks of their work. The business that they work for takes on legal responsibility and also bears liability to fix any issues with the employees work.

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