An employee can be set up in the workplace in a similar way to a contractor, but generally employers set them up with all they need to do their job, they don’t make a profit or loss from work carried out (just a wage or salary), perform certain duties as agreed and work hours set out in their employment contract. They will also have access to leave entitlements such as sick leave and annual leave.
Contractors usually run their own business and take on a contract for a specific purpose. They can often set up their own working hours and arrangements and set their fees to make a profit on each specific job. They may also work for a variety of clients at one time.
Defining a contractor vs an employee
Working out whether a worker is an employee or contractor, means looking at the whole working arrangement, including the specific terms and conditions under which the work is performed. The tax office will consider all of the following factors together:
- Ability to sub-contract/delegate
Does your agreement or contract give the worker the right to pay another person to do the work instead of them? An employee can’t sub-contract or delegate the work whereas a contractor can.
- Basis of payment
Review the basis of the amount you agree to pay the worker. If it’s a set amount per period this is considered an employee. If you pay a price per item or activity, this is a characteristic of a contractor.
- Equipment, tools and other assets
Review who is responsible for providing the equipment, tools and other assets (such as heavy machinery or motor vehicles) needed to perform the work. Employees are generally not responsible for providing these whereas contractors are.
- Commercial risks
Does the worker bear any legal risk or are they liable for rectifying, at their own expense, any defect in the work performed? Employees generally don’t face commercial risks whereas contractors do.
- Control over work
Does the worker have control over the way the work in your business is performed? Employees don’t have this control, whereas contractors can decide the way in which the work is done (subject to any terms and conditions in the contract or agreement).
Does the worker operate independently from your business? Contractors can operate their own business independent of yours whilst employees work within your business.
Implications of an employee being treated as a contractor
Determining whether a worker is an employee or contractor has implications on superannuation, workers compensation and payroll tax obligations.
Whilst employees are entitled to the current rate of Superannuation Guarantee (SG) of 9.5% on top of their gross wage, contractors are responsible for making their own superannuation contributions. Care must be taken in hiring a ‘contractor’ because if they are consequently deemed to be your employee you may be required to pay SG on their behalf, even if you have already factored this into their contractor rate.
- Workers Compensation
Contractors are required to be covered in their own right for insurance purposes. Again care must be taken when engaging contract labour as employers can be liable for workers compensation on workers subsequently deemed to be employees.
- Payroll Tax
Technically, genuine contractors are not required to be included in your payroll tax calculations. However, if a contractor is subsequently deemed to be an employee for payroll tax purposes, amounts paid to that contractor are then required to be incorporated, potentially pushing your business over the threshold and certainly adding to an existing liability.
As explained above, it is very important to know the differences and subsequent implications of whether someone is a contractor or an employee. For further information on this distinction to avoid potential impacts on your business, get in touch with BLG Business Advisers online or call (02) 4229 2211.