Contractor or Employee – What You Need to Know

What is the difference between a contractor and an employee and whose responsibility is it to get right? While employees and contractors might seem similar, there are distinct differences between the two working arrangements.

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Employee

• Employees work in the business and are integral to that organisation.
• They have legal rights and employee entitlements under the Fair Work Act 2009.
• Employees have a reasonable expectation of ongoing work, agreed hours and duties.
• They are covered by the employer's workers compensation insurance.
• Employers must pay them the superannuation guarantee.
• The employees are not exposed to any financial risk associated with the business.

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Contractor

The contractors difference may be subtle, but there are factors to look out for:

• A contractor is actively running and advertising their own business.
• They may be working for more than one client and dictating their own fees.
• They are responsible for their own insurance, equipment, licenses and tax.
• There is a high level of independence, discretion and control as to how and when the work is performed, as well as being able to delegate work to their own employees or contractors.
• They are liable to fix mistakes at their own cost.
• They will likely use their own tools for the job and manage their own tax withholding.
• A contractor may or may not be paid super depending on the nature of the work engagement.

It is the business owner's legal responsibility to determine the nature of the work and the correct basis of engagement — but we can help you get it right.

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Multi Factor Test

There are many factors involved in deciding whether someone who performs work is an employee or contractor, and the guidelines must be applied individually to each working arrangement. There is no single overriding factor, rather, the totality of the working relationship and nature of the work being done is taken into consideration.

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Sole Trader as a Contractor May Not be Right

When sole traders are engaged as independent contractors, the business owner needs to check whether they really meet the criteria for being engaged as a contractor. Many sole traders engaged as contractors are not actively carrying on a business, even if they have their own ABN, and do not have the level of independence that a contractor should have. When this happens, the contractor misses out on their employment entitlements, and there could be penalties for the employing business. If an employment dispute arises, you may need to seek independent legal advice.

Sole traders are often engaged for their own services and labour, are not free to delegate the work to someone else and must work under the direction of the employing business. In this case, they should be engaged as an employee and not a contractor.

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Factors to Consider

This is not an exhaustive list but some of the main factors to assess.

• Is the worker engaged to provide services and achieve a specific result or are they engaged for their labour?
• Are they able to delegate their contract to another worker (contractor/employee) within their own business?
• How much choice do they have in where, when and how they perform work?
• Who is liable to fix damages or mistakes?
• Is the service integral to the business?
• Do they advertise services and accept work from other businesses?

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Independent Contractor or Casual Employee?

If you are not sure whether a worker is an employee or a contractor, check the Australian Taxation Office ATO Employee or Contractor information first.

It's okay to engage a worker as a contractor initially and to reassess the engagement three to six months later if the situation is unclear. However, at that point, if the worker does not meet the contractor definition, but you don't need a permanent employee, it might be wise to put them on as a casual employee. This is often the best solution for both parties so that the employer is compliant with tax, super and employment laws and the worker retains some flexibility while being paid super, accruing annual leave and sick leave, and having tax taken care of. By beginning a casual employment relationship, you avoid being accused of having a sham contracting arrangement.

The ATO and the Fair Work Ombudsman are particularly concerned with the validity of sole traders treated as contractors, as they are the workers most frequently disadvantaged by being classified incorrectly as a contractor when they in fact meet the test for being an employee.

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Get it Right to Avoid Penalties

A business that should have engaged a worker as an employee will be liable for back-payment of entitlements (such as leave, overtime and allowances), and superannuation.

Some situations are straightforward to work out – but many contractor or employee decisions are not so easy with so many factors to consider. Let us help you get it right and sort out the tax and superannuation obligations for all your workers whether contractors or employees.

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