For a startup business, the decision between hiring an employee or contractor is not one to be taken lightly. Increased manpower can help your business grow, but does it matter whether you hire employees or contractors?

Capital

It might sound simple, but the decision to hire either employees or contractors may lie simply on your financial situation. Employees are entitled to an ongoing wage or salary and have entitlements such as annual leave. Contractors bill you for the work they have completed and can be hired 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.

The work space

If you are operating 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 etc. 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.

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. Information that you consider confidential in nature may not be as strongly protected. 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 and intellectual property (IP) is created while they are employed, the IP is owned by you, the employer. Contractors, however, are considered to own the IP they create on your behalf. If you are in a business where the ownership of IP is an important aspect of your business, for example, in software development, you have a much stronger claim to the IP created by an employee than a contractor. In both cases, it would be important to draft clauses in your agreements to address IP ownership rights so that your business interests are protected.

Tax and superannuation

A contractor uses their own ABN and renders invoices for payment. They are responsible for managing their own tax and super obligations. An employee has their income tax withheld from their payments and an employer may also be required to pay super annuation payments for eligible employees. The added tax and super obligations for employees may be a factor to consider when making your decision.

The difference between an employee and contractor can be a fine one, but your worker’s classification will determine their rights and entitlements as well as any of your obligations as an employer. We’ve only given you a rough guide of factors you might need to think about. When you’ve made your decision to hire, make sure you have an employment lawyer on hand to draft your Employment or Contractors agreement.

Conclusion

It’s important to consider whether hiring an employee or contract will be more appropriate. If  you’d like to speak with one of our employment lawyers about how to hire an employee or contractor just give us a call on 1300 544 755 or fill out the form on this page!

Lachlan McKnight

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