As an employer, it is vital that you understand whether a worker will act as an employee or a contractor when you hire them. It is important because there are significant differences in your taxation, superannuation, and other obligations based on whether a worker is an employee or a contractor.

For example, if you treat workers like contractors when they are legally functioning as employees, your business will be liable for fines and other penalties. Likewise, as a worker it is crucial that you understand the status of your working relationship with an employer. Employee or contractor status has a significant effect on your workplace rights and entitlements under law.

It is important that businesses which are unsure as to their employment arrangements with workers check to ensure that they are complying with the law regarding contractors and employees.

How to determine if workers are contractors or employees

Employees must be individual people, so if you have hired a company then that company is a contractor for superannuation and taxation purposes. The people that do the work for you based on that contract may be employees of the company you hired, but they are not legally your employees.

There are some types of workers who must always be treated as employees. Such as:

  • Trainees;
  • Apprentices;
  • Labourers;
  • Trades assistants/

Any time that an individual is hired by your business, you will need to determine whether or not they are being treated as an employee or a contractor and fulfil your taxation and super obligations based on this. The following information can be used as a guide on determining whether or not your workers are contractors or employees.

Ability to delegate/subcontract

Employees are unable to delegate work or pay other people to do the work for them, as they are bound by an employment contract which requires them specifically to carry out the work.

Contractors are freely able to subcontract the work; they are able to pay other people carry out the tasks required.

Basis of payment

Employees are payed based on either the amount of time they have worked, the number of items or activities they have completed, or a commission based on sales.

Contractors on the other hand are paid for a specific result, the amount paid is based on a price quoted or agreed upon before the work commenced.

Tools, equipment, and other assets

For employees, the employer for whom they are working provides most or all of the equipment needed to complete the work. Or in some cases, the employee provides the equipment or materials, but receives reimbursement from the employer for doing so.

Generally, contractors provide all of the equipment or materials required to complete the work and do not receive any reimbursement or allowance for this. The amount of money required for the supply of such materials is usually negotiated into to the price set for the contract.

Commercial risks

Employees take no commercial risks. An employer’s business or entity is legally responsible for work completed by the employee and is liable for the cost of any defects in that work, or rectifying problems with that work.

Contractors are taking a commercial risk by engaging in the work, as they are legally responsible for that work. Any defects or problems with the work must be rectified by the contractor at their own expense. 

Control over the work

Employees generally do not have control over their work, in the sense that their employer has the legal right to direct the way in which they work.

Contractors have freedom over the way in which work is completed, though this is usually subject to the agreed upon terms and conditions of the contract under which they are working.

Independence

Employees are considered a part of the business for which they work.

Contractors are effectively running their own business, and are not legally part of the business for which they may be working. Contractors are bound to complete only the work that is agreed upon in the contract, and are free to refuse or accept any additional work at their own discretion.

Taxation and superannuation obligations

These vary depending on whether a worker is employed as a contractor or an employee.

For employees:

An employer must withhold tax from the wages paid to the employee, and report and pay the amount withheld to the ATO. Employers must also pay superannuation for their employees.

For contractors:

Contractors are generally required to manage their own tax obligations. A business that has hired a contractor is not required to withhold tax for that contractor unless they have failed to provide an ABN.

Contractors also handle their own superannuation, but someone hiring a contractor may be required to make superannuation payments if that contractor was hired primarily for their use as labour.

It is against the law to wrongly treat employees as contractors, so ensure that you are aware of the difference.

If you are a worker and believed you are being treated as a contractor when you are really an employer, you should obtain legal advice as soon as possible.