Employee vs Contractor and Obligations

Contractor Misconceptions

Firstly, let's start by dispelling a common misconception in the realm of contractors: having an Australian Business Number (ABN) does not automatically classify one as an independent contractor. Someone simply obtaining an ABN while working for an employer under their direction does not necessarily make them a contractor.

The ATO has various factors to determine employment status, which dictates obligations around things such as PAYG Withholding, superannuation, and workers’ compensation.

Understanding the Contractor Dynamic

In Australia, a contractor typically manages the day-to-day operations of their own business. They use their own processes and equipment, negotiate fees independently, and are often contracted for specific projects. Contractors have the flexibility to set their working hours and may work for multiple clients simultaneously.

It's important to note that certain workers, like apprentices and trainees, are inherently employees and cannot be classified as contractors. Additionally, engaging a company, trust, or partnership for services always falls under a contracting relationship, as employees must be individuals.

Key Factors in Distinguishing Contractor vs. Employee

To work out whether a worker is an employee or contractor you need to look at the complete working arrangement, including the specific terms and conditions under which the work is performed. The ATO for example will generally consider all of the following factors together:

Ability to Sub-Contract/Delegate

Contractors: Have the right to engage others to perform the work on their behalf. This ability to sub-contract or delegate tasks indicates a more independent contractor relationship.

Employees: Generally, employees cannot sub-contract or delegate their work, as they are expected to perform tasks as part of their employment.

Basis of Payment

Contractors: Typically receive payment based on a quoted price for a specific outcome or project. This method suggests a more project-based or outcome-oriented engagement.

Employees: Receive fixed amounts per period (e.g. hourly, weekly, or monthly). This regular, predetermined payment structure is indicative of an employer-employee relationship.

Equipment & Assets

Contractors: Provide their own tools, equipment, and resources necessary to complete the work. This reflects a level of independence and self-sufficiency.

Employees: Often use tools and equipment provided by the employer to carry out their duties. This dependency signifies a more traditional employment arrangement.

Commercial Risk

Contractors: Bear legal and financial risks associated with the quality and completion of their work. They are responsible for rectifying any defects in their work.

Employees: Generally, employees do not face commercial risks, as these are assumed by the employer. Any issues or defects are typically the responsibility of the employer.

Control Over Work

Contractors: Enjoy a higher degree of autonomy in determining where, how, and when the work is carried out. The specifics are often outlined in the contract or agreement.

Employees: Operate within the parameters set by the employer, with limited control over work location, methods, and hours.

Independence

Contractors: Operate independently from the business, with the freedom to accept or refuse additional work. They are considered external service providers.

Employees: Integral to the business, working within the organisational structure and under the direction of the employer.

It’s important to note that even if a worker has been determined as a contractor, this may not remain the case into the future. Evolving work conditions and agreements mean those determining factors need to be revisited regularly.

Employer Obligations to Contractors

Once you’ve determined your worker is a contractor, here are your general obligations around taxes, superannuation, insurances and reporting:

Superannuation

Contractors are responsible for handling their own superannuation contributions. That means you make no superannuation guarantee payments on their behalf.

PAYG Withholding

Whilst employers are required to make ongoing PAYG Withholding payments on behalf of their employees, this does not apply to their contractors. Contractors typically bear the responsibility of managing their own tax obligations, including their income tax.

Workers Compensation

Contractors must have their own insurance coverage for work-related injuries or accidents.

Payroll Tax

Generally, payroll tax is applied to the total remuneration paid by an employer to its employees, however some contractor agreements may be what is considered an ‘employment agency contract’. If this is the case, payroll tax also applies to those payments.

Taxable Payments Annual Report (TPAR)

Some businesses that pay contractors for specific services are required to lodge a report each year commonly referred to as a “TPAR”. These services include:

• Building and construction services
• Cleaning services
• Road freight and courier services
• Information technology services
• Security, investigation or surveillance services

In essence, understanding the distinction between your employees and contractors is vital to comply with employment and taxation obligations. Seeking professional advice is recommended to navigate these complexities and ensure adherence to regulatory requirements. Our team at BLG Business Advisers are Wollongong Accountants who service all around Australia and are here to assist you, so please talk with us if you would like some guidance.

Whatever you decide we wish you every success!