Whether someone is an employee or a contractor at a company will depend on the relationship between the individual and the employer.
While the two are fairly similar, the difference between employees and contractors come into play regarding things like tax, superannuation contributions, payment and employment laws.
Therefore, whether you’re the employer, or the worker, knowing the difference between the two is crucial because it will directly affect you.
We’ll discuss the key differences between an employee and a contractor for clarity, because having “contractor” written on a contract doesn’t guarantee that the person is one by definition.
How to Work Out the Difference Between Employee and Contractor Using the Common Law Test
Establishing the difference between the two is particularly important when it comes to paying your tax to the Australian Taxation Office (ATO) because an employee and a contractor have different tax requirements.
The Australian Building and Construction Commission (ABCC) is a regulatory body governing construction in Australia, and they describe the common law test as the multi-factor test that courts use to determine if someone is an employee or an independent contractor.
There are various factors that have been identified which point towards either one or the other, which we will discuss below.
How Much Control Does the Employer Have?
Employee: If you are an employee, your employer can dictate most instances of how, when and where you are to perform work. Tasks are performed as the employer requests them.
Independent contractor: The employer will communicate an outcome, and a contractor works at their own discretion to reach the agreed upon outcome.
Can Work Be Delegated?
Employee: All work designated to an employee must be personally performed by them only. Tasks are not allowed to be delegated unless authorised by the employer.
Independent contractor: A contractor may use their discretion to delegate tasks.
Who Owns the Tools and Equipment?
Employee: In most cases, the employer provides all tools and equipment and they are housed at the place of work. Employees can generally claim back any money they spent in order to perform the required task.
Independent contractor: Independent contractor work typically entails using their own equipment and own tools.
What Leave Is Available?
Employee: Annual leave, long service leave and sick leave are available to employees.
Independent contractor: Contractors aren’t entitled to leave.
How Are Working Hours Structured?
Employee: An employee has set hours of work that are agreed on upon employment.
Independent contractor: Independent contractors work more flexible hours. The contract will detail the due date for work, and contractors can structure their hours as they wish so long as the work is completed by the deadline.
Can Workers Be Employed Elsewhere Simultaneously?
Employee: An employee is exclusively employed by their employer and cannot take on any other work.
Independent contractor: Contractors can engage more than one client at a time.
Who Is Responsible for Any Mistakes Made?
Employee: The employer bears the responsibility for any faults or sub-par work performed by an employee and there is therefore commercial and financial risk involved.
Independent contractor: Independent contractors are responsible for rectifying mistakes at their own accord. They assume the liability and risk of losing money so they generally have their own insurance.
What Is the Payment Structure?
Employee: An employee performs work and is paid periodically by their employers on an ongoing basis.
Independent contractor: Contractors are paid per service or work completed, depending on the agreement. A tax invoice can be issued when collecting payment.
What Is the Method of Engagement?
Employee: An employee is engaged at an individual level.
Independent contractor: A contractor is engaged through various entities like a sole trader, partnership, trust, company or agency.
What Is the Business Structure?
Employee: Employees are part of their employer’s business.
Independent contractor: Contractors have their own business that’s independent of the employer.
How Do Superannuation Payments Work With Employees and Independent Contractors?
The Australian Taxation Office states that an employee works in and is part of your business while a contractor runs their own business.
According to the Superannuation Guarantee (Administration) Act 1992 (cth) (SG Act), employers are required to make superannuation payments for their employee benefits.
When it comes to contractors, they are mostly not entitled to superannuation because they aren’t part of your business.
But, there are numerous scenarios where they should be considered as an employee for the purpose of being paid superannuation:
- if someone is employed wholly or principally for their labour.
- the worker is paid for their skill rather than to achieve a result.
- they perform the work personally without delegating
Take note that even if an independent contractor has an ABN, they can still be considered an employee and receive the employee benefits of superannuation.
Contractors who don’t receive super from employers are responsible to pay for themselves.
Look Out For Sham Contracting!
A sham contracting arrangement can occur when an employer structures a worker’s employment contract so that they appear as a contractor rather than an employee.
This can be done by mistake or intentionally. When done intentionally, it’s generally so that the employer can avoid certain taxes or exploit workers through paying minimum wages, avoid paying superannuation and workers’ compensation and dismiss leave entitlements.
As per the sham contracting provisions act of the Fair Work Act 2009, employers are not allowed to:
- knowingly, or even recklessly, misrepresent an employment relationship as an independent contracting arrangement,
- say that an employee is an independent contractor if that is untrue,
- dismiss, or even threaten to dismiss, an employee with the intention of employing them as an independent contractor instead, and
- make false statements knowingly to try and persuade or influence an employee to resign as such to become an independent contractor.
Sham contracting is highly illegal and employers are liable for serious penalties if they fail to comply with these provisions.
Distinguishing the difference between an employee and a contractor is crucial because if a business owner is paying staff incorrectly, he or she is held liable for penalties and charges because of evading employer obligations and superannuation requirements.
While sham contracting occurs because of an employer’s ill intentions and greed, a rise in negligence is a possibility due to the contracting opportunities becoming more popular and readily available for businesses.
Both independent contractors and employees are encouraged to seek professional advice to ensure that they aren’t being taken advantage of by their employer and that the benefits owed to them are being received.
Employers who have their own business should also seek independent legal advice to ensure that they are paying workers correctly as per each working arrangement and in accordance with the Fair Work Act.
We can provide professional advice and guidance to all parties involved, so contact us today to get started.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.