Contractor vs. Employee: What’s the Difference?
Choosing the right type of worker is vital in today’s on-demand economy. If you run a business, you need to decide whether to hire independent contractors or employees – or a combination of both. The MB+M Business Services team provides a guide of how to decide on whether to choose a contractor or employee & what you need to know.
Difference Between Contractor and Employee
What is the difference between a contractor and an employee and whose responsibility is it to get right?
- works in the business and is integral to that business
- has rights and entitlements under the Fair Work Act 2009
- has a reasonable expectation of ongoing work, agreed hours and duties
- is covered by the employer’s workers comp insurance
- is paid superannuation guarantee.
- is actively running and advertising their own business
- is responsible for their own insurance, equipment, licenses and tax
- has a high level of independence, discretion and control as to how and when the work is performed, as well as being able to delegate
- is liable to fix mistakes at their own cost
- 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.
Multi Factor Test
There are many factors involved in deciding whether a worker is an employee or contractor and the guidelines must be applied individually to each working relationship. There is no single overriding factor, rather, the totality of the working relationship and nature of the work being done is taken into consideration.
Sole Trader as a Contractor May Not be Right
When sole traders are engaged as 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.
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.
Factors to Consider
This is not an exhaustive list but some of the main factors to assess.
- Is the worker engaged to achieve a specific result or are they engaged for their labour?
- Are they able to delegate their contract to another worker within their own business?
- How much choice do they have in where, when and how the work is performed?
- 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?
Contractor or Casual Employee?
If you are not sure whether a worker is an employee or a contractor, check the 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, 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 and having tax taken care of.
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.
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. To make sure the business is paying the employees correctly, they should use timesheet software so that employees can log their own hours that they have worked. This will help the business to give employees the correct entitlements.
Some situations are straightforward to work out – but many contractor or employee decisions are not so easy with so many factors to consider. MB+M’s Business Services team has extensive experience in advising clients to get it right, and sort out the tax and superannuation obligations for all your workers whether contractors or employees.
If you have questions, or looking for some help, then call MB+M on 03 5821 9177 and speak to an experienced Business Advisor.
1. ATO Employee/contractor decision tool
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