To help meet increases in demand for your business, you may consider hiring contractors to create short-term capacity. As an employer, determining whether you’re hiring an employee or engaging an independent contractor is critical, as getting it wrong can be costly to the business.
Over the past 2-3 years, some industries across Australia have seen a rise in claims by contractors looking for compensation for not being paid full ‘employee’ entitlements.
As a business owner, it is your legal responsibility to determine the nature of work and the correct basis of engagement to correctly determine if a worker is an employee or a contractor.
Sometimes, a person might seek a contracting relationship for perceived tax benefits or the company might want to keep employment flexible. However, by law, it is the nature of the employment relationship that defines whether someone is a contractor or an actual employee. No one can opt out of basic employment standards and entitlements or their statutory tax and superannuation requirements.
What are the differences between a contractor and an employee?
The ATO and the Fair Work Ombudsman have been very particular about setting the difference between the two. Employees are entitled to different benefits such as leave, overtime payment, and allowances. Treating workers as contractors, when they’re in fact considered employees, will have you liable to penalties.
So what are the differences between a contractor and an employee? Let’s break it down.
These are people working in a contract “of service”, serving the employer under a relevant award, agreement, or employment contract.
- Is directly hired by the company or business and is integral to the business.
- Is qualified to receive rights and entitlements under the Fair Work Act 2009.
- Has a reasonable expectation of ongoing work, agreed hours and duties, and (generally) told how, where and when they work.
- Is covered by the employer’s workers’ compensation insurance.
- Is paid by the payroll system, with PAYG and any fringe benefits deducted.
- Is entitled to the superannuation guarantee.
- Must apply for time off.
A contractor is someone working in a contract “for service”, serving themselves by delivering outcomes to their client(s).
- Is actively running their own business.
- Is responsible for their own insurance, equipment, licences and tax.
- Has a high level of independence, discretion and flexibility as to how and when the work is performed (i.e. They can dictate their own time off).
- Is able to delegate work to other workers in their business or hire subcontractors (usually with consent from the principal).
- Takes liability to fix mistakes and losses incurred made at their own cost.
- May or may not be entitled to a superannuation guarantee depending on the nature of work and engagement.
- Have most workplace rights but different tax, insurance, and superannuation responsibilities.
What are the questions to consider to determine if a worker is an employee or a contractor?
To help you properly assess whether a worker is considered an employee or a contractor, you may look at several factors and guidelines through a multi-factor test, which looks at the totality of the working relationship and the nature of work. Here are some questions to consider.
- Is the worker engaged to achieve a specific result or for their labour?
- Is the worker’s service integral to the business?
- Can they accept work from other businesses or do they work exclusively for your business?
- Can they delegate their contract to another worker within their own business?
- How much flexibility do they have when it comes to how the work is completed?
- Who is liable to fix damages, mistakes or losses?
- Who provides the tools and equipment they use to perform their job?
- Who sets the hours of work they should perform in an agreed set of time?
What is sham contracting?
Sham contracting occurs when a company deliberately disguises an employee as a contractor in order to avoid granting the employee certain entitlements such as leave, workers’ compensation and superannuation payments.
Under the Fair Work Act, these are considered sham contracting agreements:
- Misrepresenting an employment relationship as an independent contracting arrangement
- Dismissing or threatening to dismiss an employee to be able to engage them as an independent contractor to do the same work they performed as an employee
- Saying something false to persuade an employee to perform the same work as an independent contractor
Properly determining whether a worker is an employee or an independent contractor is a legal obligation of the employer. As such, you need to be careful about the differences between the two to avoid facing hefty penalties. The ATO has created an employee/contractor decision tool to help you decide whether you’re engaging an employee or a contractor.
The nature of the employment situation is usually obvious, although project work of fixed duration or finite funding can be complicated. Knowing when a worker is a contractor or an employee can be tricky, but there are penalties if you get it wrong.
If you have further questions about the differences between employees vs contractors, we are here to assist you along your journey. Contact our expert business advisors today or call us at 07 3878 9181.