What is the difference between a contractor and an employee?
When you are running a business, hiring people can seem like a confusing process. To make things more complicated, there are multiple employment types in Australia. When choosing who to hire for your business, it is important to be aware of these different employment types. In particular, you should know whether or not you are hiring a contractor or employee. This ensures that you can take the correct steps to stay on top of tax and superannuation requirements. This article explains the difference between a contractor and an employee and your employer obligations.
Contractor vs Employee
There is no definition of an ‘employee’ or ‘independent contractor’ under the Fair Work Act. However, Australian courts (case law) have focused on the contract as the most important element to consider when deciding the true nature of the relationship.
How Can I Tell?
Many factors contribute to determining whether your worker is an employee or independent contractor. Knowing the difference is essential. While there are no clear cut rules to tell the difference between a contractor and an employee, the table below outlines some key indicators.
| Indicator | Employee | Independent Contractor |
| Intention | There is an intention to create an employee/employer relationship. For example, the worker:
| There is an intention for the worker to be engaged as an independent contractor. For example, they:
|
| Control | The employee performs work under the direction of a manager or supervisor. Likewise, this manager determines:
| Independent contractors have a high degree of control over their work, including when and where they work and how they conduct their work. |
| Responsibility | Financial responsibility falls to their employer. | A contractor bears the risk for profit and loss on all tasks. They are also personally liable for any injury acquired during their work. |
| Working hours | Usually works a standard or set working hours, except for casual employees. | The contractor controls what hours they will work. A contractor agreement usually determines these hours. |
| Tax | An employer will deduce income tax. | A contractor pays their own income tax and GST. |
| Superannuation | An employee has legal entitlements to superannuation contributions. | A contractor is responsible for paying their own superannuation contributions. Note that in some circumstances, contractors may have entitlements to superannuation contributions. Indeed, you should seek advice on this. |
| Ongoing work | Usually expects ongoing work, except when employed on a casual basis or on a fixed-term contract. | Is usually engaged for a specific task and has no promise of ongoing work. |
| Leave entitlements | Entitled to receive paid leave (except in the case of casual employers). This includes long service leave, annual leave, sick leave etc. | A contractor has no legal entitlements to paid leave. |
Considerations
When you are engaging an individual, you must decide whether or not you want to engage them as a contractor or an employee. You should note that it is illegal to hire someone as a contractor to avoid certain legal obligations. This is known as sham contracting.
Rights and Protections
Additionally, a contractor does not have many legal rights or protections. Although they are protected from adverse action or coercion, they do not have many employment entitlements. For example, unfair dismissal laws do not apply to contractors. This means that if you terminate a contractor agreement, they will not have any legal recourse (unless you breach the contract).
On the other hand, under the Fair Work Act, an employee can access a variety of employment entitlements. These include:
- minimum wage;
- paid leave entitlements; and
- redundancy pay.
Key Takeaways
Whether you choose to hire an employee or a contractor will depend on your business requirements. You should ensure that you make the right decision so you can fulfil all your legal obligations.
For legal assistance, visit LegalVision.