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If you or your business wish to hire someone to guide you through setting up a business, educating your employees or improving business practices, you may consider hiring a consultant. A consultant’s tailored skill-set can help fulfil your business needs. A consultant can offer your business flexibility and a range of resources that your business could not have otherwise accessed.

Consultant is a broad term that encompasses any professional that provides expert advice within a particular industry or field. The role of a consultant is advisory in nature, and they can provide their services internally or externally. Businesses can engage them for a one-time job, or to complete work over a period. This can make the nature of the consultant’s employment confusing – are they an employee, or are they a contractor?

Common Misconceptions

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 simply the norm in their particular industry to classify workers as contractors.

The nature of the relationship will differ depending on an individual’s circumstances.

Contractor or Employee?

Working out whether a business will engage a consultant as an employee or a contractor is critical. There are important tax, super and insurance obligations dependent on the classification of a consultant and incorrectly treating an employee as a contractor can lead to significant penalties.

When determining whether a consultant is an employee or contractor, businesses will need to consider six key factors.

1. How is the Consultant Paid?

If the consultant is being paid for the time they work, or by way of commission, per activity completed or other fixed periodic sums, then they are likely to be an employee. A contractor is paid based on the outcome of the work of which they have quoted a fee.

2. Who Provides the Tools and Equipment?

A business that provides the consultant with most or all of the tools and equipment needed to complete the work, or reimburse them for costs incurred in providing their tools and equipment, indicates the consultant is an employee. A contractor will provide most or all of their tools and equipment for the job.

3. Who Has Control Over the Work Completed?

If the business is regularly giving direction to the consultant for the work to be done – what they do, when and where they do it, and how they carry it out – this suggests an employee/employer relationship exists. In comparison, contractors have more freedom in the way they complete work, within the ambit of their contract. If the business engaging the contractor wishes to have more control, this will need to be specified in the contract.

4. Can the Consultant Delegate or Subcontract Their Work?

Employees cannot delegate or subcontract the work they are engaged to complete. A contractor, however, is free to subcontract or delegate their work, and their contract will typically provide for this.

5. Is the Consultant Running an Independent Business?

An employee does not conduct their work independently of the business, and their work is done exclusively for the business. Everything the employee does is part of the employee’s business processes and systems.

A contractor, however, operates their own independent business and performs work based on the terms and conditions of their contract. The business may request the contractor to perform additional tasks, but the contractor is free to accept or refuse to do this work.

6. Who is Legally Responsible for the Work Done?

An employee is generally not responsible for the work done through the business. If mistakes or defects have occurred, then the business is liable, and must either rectify the problem itself or require the employee to do so and provide reimbursement. A contractor, on the other hand, takes on the commercial risk of their work and is wholly responsible for rectifying and paying for any mistakes or defects.

Key Takeaways

No single factor described above will provide you with a conclusive answer. You will need to look at all of the above factors as a whole, and other conditions in the contract, before concluding whether you are taking on a new employee or a contractor.

If you are unsure whether to hire a consultant as an employee or contractor, get in touch with our employment lawyers. If you need assistance in drafting a contractor or employment agreement, one of our contract lawyers can assist you. Questions? Let us know on 1300 544 755.


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