Is a Consultant a Contractor or Employee?

In Short

• A consultant provides expert advice or strategy, while a contractor is engaged to deliver specific tasks or outcomes.
• How you define the role affects tax, superannuation, and insurance obligations, with penalties for misclassification.
• Written agreements should set out scope, IP ownership, and deliverables to avoid confusion and reduce legal risk.

Tips for Businesses

Create clear contracts that define whether a person is a consultant or contractor, outline deliverables, specify IP ownership, and confirm you are meeting tax and superannuation requirements to remain compliant and avoid penalties.

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Table of Contents

• What is a Consultant?
• Contractor or Employee?
• Key Factors to Determine the Difference
• Key Takeaways
• Frequently Asked Questions

If you wish to hire someone to help set up your business, educate your employees, or improve business practices, you may consider hiring a consultant. Indeed, consultants have tailored skill sets that can help fulfil your business needs. In addition, a consultant can offer your business flexibility and a range of resources otherwise unavailable to you. This article will explore the nature of employment relationships with consultants and whether they should be considered employees or contractors. 

What is a Consultant?

‘Consultant’ is a broad term encompassing any professional who provides expert advice within a particular industry or field. That is, consultants provide their services internally or externally, in an advisory capacity. Likewise, you can engage them for a one-time job or an extended period of work. 

Businesses may run into the mistake of assuming their consultant is a contractor simply because:

• they have a registered Australian Business Name (ABN);
• the business invoices them for the work done; or
• it is an industry standard to classify workers as contractors.

However, the nature of this relationship will differ depending on your individual circumstances.

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Contractor or Employee?

In summary, a contractor is an individual or business that your business hires to complete specific functions. On the other hand, an employee works for you and is employed by you, in your business.  

The difference between contractors and employees can be subtle,  but this can be a critical distinction. There are important tax, superannuation, and insurance obligations that depend on the correct classification of a consultant, and incorrectly treating an employee as a contractor can lead to significant penalties. That is, such misrepresentations can put you at risk of a claim against you for ‘sham contracting’. 

As such, even if an individual initially agreed to a contractor arrangement, courts will look beyond this agreement to examine how the relationship operates in practice.

Key Factors to Determine the Difference

When determining whether a consultant is an employee or contractor, businesses must consider six key factors, outlined in the table below:

Key Takeaways

Consultants can provide a valuable perspective in setting up your business or improving business practices. However, it is essential to correctly label consultants as employees or contractors. No single factor will provide you with a conclusive answer; rather, you must consider various factors together. Before concluding whether you are taking on a new employee or a contractor, you must look at all of the above factors and other conditions in the contract.

 If you are unsure whether to hire a consultant as an employee or contractor or need assistance drafting a contractor or employee agreement, 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