By Alisa Sainoski

What is the shifting line between a “contractor” and an “employee”?  With the advancement in the digital economy the question is becoming trickier to answer.  As more companies use consultants, contractors or freelancers on a project basis rather than to hire full time staff, the line seems to shift.

The simple distinction between contractors and employees is an employee works in your business and receives superannuation, leave and other entitlements.  A contractor on the other hand runs their own business, pays their own superannuation, withholding tax and does not in most cases, receive employee-like entitlements.

Examples of common mistakes people make is when a person providing services to an organisation has their own business.  Having a registered business name, Australian Business Number and submitting an invoice for work does not make someone a contractor.

The factors to determine the difference are outlined below:

Employees do not have a right to direct the way in which a business runs or how the employee completes their work.  Contractors have the freedom of how the work is to be completed and are only subject to specific terms in an agreement.  They have the main control to direct how, where, when and who is to perform the work.

Employees do not have the ability to subcontract or delegate work, they are the only ones who are allowed to complete the work and cannot pay someone else to do the work for them.   Contractors however, have the ability to subcontract and delegate the work meaning they have full capacity to pay another person to complete the work for them.

Contractual arrangements may contain a definition on the nature of the relationship between the parties.  However, the definition can be given little weight if it contradicts the effect of the agreement or the practical relation between the parties.  Employers who label their relationship as “independent contractors” whether by a written contract or otherwise, will have no effect where that relationship, in practice, is really one of employment.

Employees are paid for the time they have worked, a price per item/service or through a commission.  Whereas a contractor is paid on the achievement of an outcome by a calculated quote for a “given result”.  Overall, an employee has no discretion to accept or decline work.  While a contractor has the right to choose whether to complete a job or not.

Employees do not operate independently of the business, they work within and are considered part of the business.  Contractors on the other hand, operate their own business independently of the business they are contracted to.  They can complete the work on any day during any hours which they choose, unlike employees where an employee has set hours of work determined by their employer.

Employees bear no commercial risks and responsibilities for any poor workmanship or injury sustained in the performance of the work indicated.  Employers are legally responsible for the work done by the employee and liable for the costs of rectifying any defect in the work.  In contrast, contractors are legally responsible for their work and liable for the cost of rectifying any defect in their work.  An independent contractor typically carries their own insurance and indemnity policies.

Employees are classified as employees when equipment, tools and other assets, all or mostly are provided to them to complete the work.  In other cases the employee has or provides most of the equipment, tools or other assets but the business provides the employee with an allowance or reimbursement for the cost of the equipment, tools and other assets.  In contrast, contractors provide all or most of the equipment, tools and other assets required to complete the work.  They also do not receive an allowance or reimbursement for the cost of the equipment, tools and other assets.

The same factors apply to subcontractors who are employed to contract with a contractor.  They will be treated as an employee if they are on wages which will entitle them to sick pay, holiday pay and superannuation, but if they are a “Subbie” they will be responsible for all of these costs.  A subcontractor will have to follow the same factors as a contractor to differentiate whether they are an employee to the contractor or a bona fide subcontractor.

The Australian Taxation Office (‘ATO’) heavily relies on their online decision tool when making a determination regarding contractors and employees.

Determining whether a person is a contractor or an employee may also have Payroll Tax implications.  In Western Australia the Payroll Tax threshold is $850,000 with a tax rate of 5.5%.  The Office of State Revenue (‘OSR’) are extremely active in the collection and administration of Payroll Tax with most businesses being caught out by the contractor versus employee question.

Further information is provided via the links below, alternatively please contact us to discuss your contractor v employee concerns.

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