Employees VS Contractors

Difference between employees and contractors

Determining whether a worker is an employee or a contractor requires reviewing the whole relationship between the individual and the employer. 

An employee is an individual who works for a business and is part of the company. The following are always treated as employees:

• Apprentices
• Trade assistants
• Labourers; and 
• Trainees 

A contractor is an individual or business who works independently from your business.Accordingly, the following commercial enterprises will always be a contractor for accounting and superannuation purposes:

• Trusts;
• Companies; and
• Partnerships

Below, we define what is an employee and an independent contractor, as well as outline some key differences.

Working Hours

Except for casual work, employees have regular and fixed working hours. Conversely, contractors usually have the freedom to decide the hours required to complete the task unless otherwise specified in their contract or agreement. 

Control over Work 

Employees typically work under the directions and supervision of their employers. On the other hand, contractors have a high degree of autonomy and control over their work, subject to any specific terms in any contract or agreement. 

Commercial and Financial Risk 

Employees face no commercial or financial risks as employers bear legal responsibility over the work done. Contractors assume commercial or financial risks and are responsible for any liability or defects. 

Ability to subcontract/delegate

Employees cannot subtract or delegate their work- they cannot pay money to other people to do their work. Contractors have the right to subcontract or delegate their work by hiring someone else to complete the work. 

Work Expectation 

Employees, including some casuals can expect to have regular and systematic work. Contractors are usually hired for specific tasks and are free to accept or refuse additional work. 

Payment

Employees receive payment routinely and can be paid weekly, fortnightly or monthly for;

• The time worked
• A price per item or activity
• A commission

In contrast, contractors are paid for the completion of a specific task based on the quote they provided, whether it be hourly rates or price per item to calculate the total cost of the work. Contractors are paid through invoices and must maintain an Australian Business Number (ABN). 

Equipment and Tools 

Employees are often provided most or all of the necessary tools, equipment and assets required to complete the work by the employee, or at least, an allowance or reimbursement for them. Contractors on the other hand, are responsible for supplying their own equipment, tools and assets required to complete the work and do not receive any allowance or reimbursement for them. 

Leave Entitlements 

Employees are entitled to leave benefits (eg. annual leave or sick leave). Casual employees receive a higher loading instead of these entitlements. Conversely, contractors receive no such benefits. 

Tax and Superannuation obligations: 

If your worker is an employee, employers are responsible for: 

• Withholding tax (PAYG withholding) from workers’ wages and report and pay the withheld amounts to the ATO
• Making superannuation payments, at least quarterly, on behalf of eligible employees 
• Report and pay fringe benefits tax (FBT) and goods and service tax (GST) to the ATO. 

If your worker is a contractor:

• They are generally responsible for their own tax obligations, employers do not have to withhold from payments to them unless they don’t quote their ABN to you or you have voluntary agreements to withhold tax from their payments
• In most cases, contractors manage their own superannuation payments, unless the contract is principally for their labour. 
• Employers don’t have FBT obligations. Contractors are responsible for their own GST and tax payments to the ATO. 

It is important to note that it is against the law to wrongly treat an employee as a contractor so you need to check that you’ve got it right, otherwise, penalties may apply. 

References:

Disclaimer

This content is intended for general information in summary form on tax and legal matters at the time of first publication and is not intended to provide, and should not be relied upon in place of appropriate professional advice.  Please consult your tax, legal and accounting advisors before acting or relying on any content provided.