Contractor Vs Employee
Most of us understand the simple distinction between contractors and employees: An employee works in someone else’s business – the business controls how, where and when they do their work, pays them a wage and superannuation, leave and other entitlements. A Contractor runs their business, pays their superannuation and tax and typically does not receive employee-like entitlements from clients.
Whether you are an employee or a contractor depends on many different factors.
- Works in someone else’s business
- The business pays for Workcover
- Are entitled to leave, holiday and penalty rates
- Has less control over how and when a job is done
- Are entitled to compulsory suuperannuation
- Have no ability to subcontract/delegate the work
- Are paid based on time worked, price per item/activity or by commission
- The business provides all or most of the equipment and tools required
- The business is leagally responsible for all work done by the employee
- Are considered part of the business
- Works for themselves and sells their services to a business
- Has to sort out their own insurance
- Has no entitlement to any benefits such as leave, holiday and penalty rates
- Has greater control over how and when a job is done
- Has to pay their own superannuation
- Can subcontract/eelegate work to other contractors by paying their rates
- Are paid for a result achieved based on their quote
- Must provide all equipment and tools required
- Are legally responsible for all work done
- Is considered to run their own business independently of their client’s business
Note: If the income you earn as a contractor is produced mainly from your personal skills, labour or expertise as an individual, the personal service income rules may apply to your income. Refer to the ATO for more information on the PSI rules.
There are many misconceptions about hiring an independent contractor.
MYTH: Workers with an ABN or registered business name are always contractors.
Having an ABN or a registered business name is not the deciding factor of whether or not a worker is a contractor. Having an ABN or being paid after submitting an invoice makes no difference to whether an employment arrangement is a contract or employment.
MYTH: People who do short-term work are automatically a contractor.
Just because someone is hired for a few hours or a couple of days at a time, doesn’t mean they’re automatically a contractor. Both employees and contractors can be hired for casual, temporary, on-call or infrequent work.
MYTH: If most people in your industry are contractors, you should be too.
Just because contracting arrangements are common in an industry, it doesn’t necessarily mean that a particular person should be treated as a contractor.
MYTH: There is a written agreement that says a worker is a contractor.
Signing a work contract stating an individual is a contractor does not overrride the true employment relationship and relevant legislation. It also doesn’t remove the business’s Pay-As-You-Go tax withholding and superannuation obligations.
Under current legislation it’s illegal for employers to misrepresent a current or proposed employment relationship as an independent contracting arrangement, or to dismiss or threaten to dismiss an employee so they can be re-hired as a contractor. It is also illegal to make misleading statements to an employee to try to persuade them to take on a contract arrangement for similar work they performed as an employee.
Both employees and contractors can request assistance from the fair work ombudsman if they believe their rights have been breached.