Employees vs Contractors – is the difference really that clear?
I have spent much time working with employers in recent years who engage contractors on a regular basis in their business to assist with both operational and core business functions. This has always been seen as a flexible way to engage people into their businesses, without the commitment, and sometimes cost, and overall management of hiring employees. However, I have noticed more and more so in the last 12 months that the use of contractors has seemingly become more common in many of the small businesses I speak to, and the line between what constitutes a contractor seems to be less clear now than ever. It’s an important point to understand, because it’s an issue the ATO looks carefully at, and, should it be bought to their attention, and you as an employer are found to be treating a contractor as an employee, then effectively it is possible that they can rule that they are in fact an employee, leaving you liable for payments you hadn’t anticipated, such as superannuation and tax. So how do you tell whether the people you engage in your business are in fact contractors or employees? Admittedly, for many businesses, the line is not that clear cut, and there are arguments on either side for their situation. The first thing I encourage you to do is review the details on the ATO website, which can be found at www.ato.gov.au. On there, you will find a handy little table (pictured below) which helps to clarify the boundaries for you.
Are you, or is your worker, an employee or a contractor?
| Factors to consider | Employee | Contractor |
| Control over work | The employer has an implied right within industrial law to direct and control the work of an employee. The employee works in the business of the employer and the employer is free to manage their business as they see fit. | A payer has a right to specify how the contracted services are to be performed. However, such control must be specified in the terms of the contract, otherwise the contractor is free to exercise their own discretion. |
| Independence | An employee performs work for the employer in accordance with an employment contract. | A contractor performs services as specified in a contract with the payer and provides additional services only by agreement. |
| Payment | Payment is often based on the period of time worked, but an employee can also work on ‘piece rates’ or commission. | Payment is dependent on the performance of the contract services. |
| Commercial risks | An employee generally bears no legal risks in respect of the work; since the employee works in the business of the employer, the employer is legally responsible for any work performed by the employee. | A contractor bears legal risk in respect of the work. They have the potential to make a profit or loss, and must remedy any defective work at their own expense. |
| Ability to delegate | An employee performs the work personally and generally cannot subcontract the work to someone else. | Unless otherwise specified in the contract, a contractor can subcontract or delegate the work. |
| Tools and equipment | The employer, except when specifically agreed otherwise, usually provides tools and equipment. | Generally, a contractor provides their own tools and equipment |
*source: ATO website At the heart of it, here are the key rules: (please note though these are not black and white, and there is some grey area in each)
- A contractor is typically paid to perform a task, not for the time they work. An example might be a contractor is paid to complete a retaining wall at your house. They are paid when finish the job, not for the number of hours). Whereas an employee must be paid for the hours they work, regardless of the output.
- As a contractor, they typically have the ability to outsource the work to another party.
- As a contractor, they control how the work is completed, within the terms of their agreement with the payer, and usually provide their own resources, such as computer, printer, office supplies, etc.
- Contractors bear their own legal risks, and provide their own insurances.
- A contractor has the ability to accept or decline projects, assignments and contracts as offered to them.
At the heart of it is the issue of control – if, as a business owner or employer, you want to very tightly control the people you engage in your business, to the point that you want to require them to work certain hours, perform work in a specific way within strict guidelines, and expect them to work exclusively for you then it’s quite likely they are an employee – no matter how you might be actually paying them. There are undoubtedly needs for both contractors and employees in the modern workplace, and contractors continue to provide an exceptional way to gain new resources into your business, without the burden and commitment of having employees. But I encourage you to know what you need in your business, and what will achieve the best result for you, and above all else be aware of the structure as set out by the ATO to protect yourself and your business from being liable for additional costs either now or in the future.
