Contractor or employee?

An employee works in your business and is part of your business.

An independent contractor (a.k.a. contractor, sub-contractor or “subbie”) effectively runs their own business, which means they operate under their own business name and are responsible for their own business compliance and commitments such as insurance, PAYG, superannuation, workers compensation, etc. Contractors do not receive paid leave and can be legally liable for the work performed under the contract.

The distinction between contractors and employees is not always clear-cut. Courts look at the relationship, and there is no single indicator to determine if a person is a contractor or an employee, which creates added complexity.

Criteria in considering the relationship with contractors:

  • Contractors are free to perform the task at the time of their choosing.

  • Contractors use their own equipment and resources, and/or don’t receive an allowance or reimbursement for the cost of the equipment.

  • Contractors can delegate or subcontract tasks to other people.

  • Contractors are usually engaged for a specific task.

  • Contractors have the skill/ability to perform services as specified in their contract.

  • Contractors are paid for the result achieved, based on an hourly rate or price per service.

  • Contractors have the ability to accept or refuse additional work.

The Australian Taxation Office (ATO) advises businesses to check their circumstances against its online decision tool, while Fair Work Act 2009 provides some general protection to contractors, but all businesses must pay employees superannuation and meet PAYG withholding tax obligations.

If you engage contractors, it is good practice to review the arrangements regularly to ensure compliance. The risk is that if you get this wrong, the courts may impose a penalty of up to A$12,600 for individuals and A$63,000 for corporations per contravention, not to mention other associated costs.

Also, the ATO is clamping down on businesses that force workers to be contractors with so-called sham contracts in order to circumvent their legal entitlements.

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