Determining whether a worker is an employee or a contractor requires examining the whole relationship between the individual and the employer. If you are a business owner needing to hire new workers, or have just started a new job but are unsure what your employment status is, the clouded distinction between the two can cause confusion. Below, we define what is an employee and an independent contractor, as well as outline some key differences.

Who is an Employee?

An employee is someone who works for an employer in a commercial enterprise, such as:

  • Apprentices;
  • Trade assistants;
  • Labourers; and
  • Trainees.

Who is a Contractor?

A contractor is an individual or business that a commercial enterprise hires to carry out specific functions. The Independent Contractors Act 2006 (Cth) explicitly states that an independent contractor need not be a natural person. Accordingly, the following commercial enterprises will always be a contractor for accounting and superannuation purposes:

  • Trusts;
  • Companies; and
  • Partnerships

What is the Difference Between Employees and Contractors?

As mentioned, whether a worker is an employee or contractor depends on the whole working arrangement that exists between them and the employer. Although no single determining factor will cause the worker to sway from one employment status to the other, some common indicators include:

Working Hours

Unless you are a casual employee, employees have regular and defined working hours. On the other hand, contractors usually have the freedom to decide what hours they work to complete the task unless otherwise specified in their contractor agreement.

Control Over Work

Employees typically work under the standards and directions their employers set out for them. Conversely, contractors have a high degree of control over how they complete the work.

Commercial and Financial Risk

Employees face no commercial or financial risk over the work as it is the employer who bears the responsibility. Contractors assume the risk of making and losing money and are responsible for any liability or defects. As such, contractors are generally required to have their own insurance.

Work Expectation

Employees, including some casuals, can expect regular and systematic work. Contractors are usually hired for specific tasks and may or may not be engaged for further work.

Payment

Employees receive payment in a routine manner whether that be weekly, fortnightly or monthly. The payment is in exchange for time. In contrast, contractors are paid for completing work which they have quoted. They are paid through invoices and maintain an ABN. The payment is in exchange for achieved results.

Equipment and Tools

Employees will benefit from their employers providing them tools and equipment, or at the least, an allowance for them. Contractors have the responsibility of supplying their own equipment and tools to complete the work.

Superannuation

Employees are entitled to superannuation payments (which they employer pays) to their nominated super fund. In most cases, contractors will have to manage their own superannuation payments.

Tax

Most employees have their tax deducted through arrangements like pay-as-you-go (PAYG). Contractors have to pay GST and make recurring tax payments to the Australian Tax Office.

Leave Entitlements

Employees have the benefit of leave entitlements (e.g. annual leave or carer’s leave). Casual employees receive a loading instead of these entitlements. In contrast, contractors receive no leave benefits.

Key Takeaways

As outlined, there are numerous indicators which will suggest whether a worker is an employee or contractor. To understand the difference between an employee and a contractor requires assessing the relationship between the employer and the worker in its totality.

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Questions about your classification? Get in touch with our employment team on 1300 544 755.

Stephen Yoon

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