Contractor or Employee – What You Need to Know

Posted 9 Apr '21

Contractor or Employee – What You Need to Know

If you hire a worker, you must check if they are an employee or contractor. It's important because:

• it affects your tax, super and other obligations
• penalties and charges may apply if you get it wrong.

If you previously hired a worker without checking, review your decision now to make sure you got it right. It is the business owner’s legal responsibility to determine the nature of the work and the correct basis of engagement.

The main differences between a contractor and an employee are-

An employee

• 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 compensation insurance
• is paid superannuation guarantee.

A contractor

• is actively running and advertising their own business
• is responsible for their own insurance, equipment, licences 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.

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.

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?

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.

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.

Some situations are straightforward to work out – but many contractor or employee decisions are not so easy with so many factors to consider. Let us help you get it right and sort out the tax and superannuation obligations for all your workers whether contractors or employees. Please feel free to get in touch with your WDF Professional team member or phone 02 6921 5444.