In Short
- Choose the Right Worker Type – Employees receive wages, entitlements, and super, while contractors manage their own tax and invoicing. Consider costs and flexibility before deciding.
- Secure Written Agreements – Clear contracts protect your business, covering confidentiality, intellectual property, and payment terms.
- Meet Legal Obligations – Ensure compliance with tax, superannuation, and workplace laws to avoid disputes and penalties.
Tips for Businesses
Before hiring, decide whether an employee or contractor suits your needs. Employees offer stability but come with more obligations, while contractors provide flexibility. Use well-drafted agreements to outline expectations and protect confidential information. Ensure you meet tax, super, and wage obligations to stay legally compliant and avoid costly issues.
Increased staff can help your business grow, but does it matter whether you hire employees or contractors? Whether you hire an employee or contractor, you will have different obligations. To ensure that you meet your obligations, you must decide whether to hire an employee or a contractor. This article will outline the key legal issues to consider when hiring staff for your business, noting the difference in obligations for an employee and a contractor.
1. Pay and Entitlements
It might sound simple, but the decision to hire either employees or contractors may depend simply on your financial situation. Employees are entitled to an ongoing wage or salary and have minimum entitlements such as annual leave. Hence, you must ensure that you pay your employee at least the national minimum wage.
On the other hand, contractors bill you for the work they have completed. In this sense, you can hire contractors for projects when needed. A contractor allows you to get work completed without the need to pay them on an ongoing basis. This can be a more flexible arrangement for businesses that have just commenced operations.
2. Work Space
If you operate from home or in a shared co-working space, you might not have the resources to set up an appropriate workspace for an employee. Employers usually provide employees with tools such as a computer, desk space, an internet connection, telephone and stationary. This all requires an investment into your workspace.
Contractors are valuable to a startup in that they use their own tools and materials to complete the job. This might help to ease your financial burden so you can allocate your resources to growing your business.
Continue reading this article below the form3. Written Agreements For Employees or Contractors
Whether you hire an employee or a contractor, you must have a robust written agreement in place which addresses key legal issues. This includes but is not limited to confidentiality.
Confidentiality
The employer/employee relationship creates certain rights and obligations. For example, an employee is obliged to keep confidential information secret. This obligation extends until even after the employment contract has ended.
Contractors, on the other hand, can often delegate their work to their own employees or subcontractors. In order to avoid the disclosure of confidential information, both the employment agreement and contractors agreement should include a clause to protect confidential information, specifying what needs to be protected.
Intellectual Property
If you hire an employee who creates intellectual property (IP) while employed, you likely own the IP as an employer. You will also likely want to own the IP your contractors developed or improved while performing the agreed services. In both cases, it would be important to draft clauses in your agreements to address IP ownership rights to protect your business interests.
4. Tax
Typically you will withhold income tax from your employee’s payments. On the other hand, contractors use their own ABN and render invoices for payment. Hence, contractors are responsible for managing their own tax obligations directly with the Australian Taxation Office (ATO).
Further, some contractors may have to pay their own Goods and Services Tax (GST) to the ATO. In this sense, the added tax obligations for employees may be a factor to consider when making your decision.
5. Superannuation
You are required to pay eligible employees superannuation into their nominated super fund. You must make a superannuation contribution (11% from 1 July 2023) on the employee’s ordinary earnings.
Generally speaking, most contractors are not entitled to superannuation payments. However, an exception to this is if you have engaged the contractor wholly and principally for their labour. You might engage a contractor wholly and principally for their labour where the contractor where:
- pay them wholly or principally for their personal labour and skills;
- pay them for each hour of work rather than to complete a specific project; or
- the contractor performs contract work personally.
Key Takeaways
Hiring staff for your business is not a straightforward task. It is important to consider whether hiring an employee or contractor is more appropriate. Once you have made this decision, you must be aware of and meet your obligations relating to:
- pay and entitlements;
- superannuation;
- tax; and
- have a robust written agreement in place to reflect this.
If you need assistance hiring employees or contractors, 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.
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Frequently Asked Questions
The decision to hire an employee or a contractor is an important one, as your obligations will differ depending on which you chose to hire. When you make this decision, you should consider whether your business can afford to provide an employee with an ongoing wage and whether you can meet an employee’s superannuation and tax requirements. In any case, it is essential to ensure that you have a robust written agreement in place.
How much you pay your staff will depend on whether you hire an employee or a contractor. An employee is entitled to the national minimum wage, noting that if an award covers the employee, they may be entitled to the minimum pay and conditions set out in the award. Alternatively, a contractor is not entitled to a minimum wage. Rather, contractors are entitled to a payment based on the terms of their engagement with you.
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