Employee or Contractor - do you know the difference?

It's important for all businesses to have systems in place to determine whether workers should be classified as employees or independent contractors, as tax, super and other government obligations are different depending on whether the working arrangement is employment or contracting.

​Employees generally have PAYG withholding, super and fringe benefits tax paid by the employer. Contractors generally look after their own tax obligations.
 
If you get it wrong and fail to meet your obligations, you risk having to pay penalties and charges.

What factors do you need to consider?
There are a number of factors which need to be taken into account which help determine whether a worker could be classed as an employee or an independent contractor.
 
It is important to realise that no single factor can determine if a person is an independent contractor or an employee. To correctly determine whether a worker is an employee or contractor, you need to look at the whole working arrangement.
 
A worker isn't automatically a contractor just because they have an ABN or specialist skills or you only need them during busy periods.
 
Courts will look at the whole relationship between the parties when determining the status of a person's employment.
 
The Fair Work Ombudsman has produced a table of common indicators that may contribute to determining whether a person is an employee or independent contractor:

The Fair Work Ombudsman has provided the following guidance on the factors which are indicative of whether a person is an employee or independent contractor:

Employees

• have their work directed and controlled by their employer
• work set or standard hours (casual employees hours can vary from week to week)
• usually have an ongoing expectation of work
• bear no financial risk – it’s covered by their employer’s insurance
• are provided by their employer with tools or a tool allowance is provided
• have income tax deducted by their employer
• are paid wages or a salary regularly
• are entitled to paid leave.

Independent contractors

• have a high level of control over how the work is done, including the choice to hire others to assist
• agree to the hours required to complete the job
• usually engaged for a specific task or time
• bear the risk of making a profit or a loss and usually bears responsibility and liability for poor work or injury and usually have their own insurance
• use their own tools and equipment
• pay their own tax and GST
• have an ABN and submits invoices
• don’t receive paid leave

A simple way to help tell the difference
 
The Australian Taxation Office on its website uses the following simple descriptions:

• Employees work in your business and are part of your business.
• Contractors run their own business and provide services to your business.

 
Why is the distinction important?
 
Employment relationships are regulated by specific labour protection laws and various awards and workplace agreements. These laws generally provide a higher degree of protection to employees than the general commercial laws that regulate contractor relationships.

This protection includes minimum conditions and standards of employment for employees including minimum entitlements for leave, public holidays, notice of termination and redundancy pay.
 
Adopt good business processes
 
Business owners need to keep records to support any decision on whether a worker is an employee or contractor and the factors relied on to make that decision.
 
Most of the information needed to support the decision can be found in a service contract for independent contractors or an employment contract for employees, which should accurately reflect the actual conditions of the working arrangement.
 
All contracts should:

• be in writing
• specify whether it is a contract for services or an employment contract;
• set out the period of engagement and the remuneration;
• include dispute resolution provisions;
• specify if/how the relationship can be terminated.

 
Penalties
It is illegal for an employer to misrepresent an employment relationship or a proposed employment arrangement as an independent contracting arrangement or make a knowingly false statement to persuade or influence an employee to become an independent contractor.
 
Under the Fair Work Act inspectors can:

• seek the imposition of penalties for contraventions of sham contracting arrangements.
• apply to the courts to grant an injunction or an interim injunction if an employer seeks (or threatens) to dismiss an employee for the purpose of engaging them as an independent contractor. The purpose of the injunction would be to prevent the dismissal from occurring, or otherwise remedy the effects. Courts can also make other orders to have the employee reinstated or compensated.

 
If you need more information or if you need assistance or advice on how to proceed please contact us.