The new guy is starting tomorrow and you’re trying to figure out if he’s an employee or contractor. What’s the difference… and does it REALLY matter which one he is?
Why you need to get it right
Determining if someone is an employee or contractor has several implications for your business meaning that getting the decision right is important. It affects a number of your obligations including superannuation, work cover, payroll tax and the type of tax to be withheld.
Therefore if you have not classified them correctly you may be under reporting and underpaying some of your obligations, which can get you into trouble with the relevant authorities.
Employee or Contractor?
While there is no black or white answer when determining if someone is an employee or contractor, there are a number of factors to consider when making the decision:
Ability to sub-contract/delegate
Generally speaking a contractor will be able to pay and delegate the work to another individual/s whereas an employee cannot. As an employer, you will not allow an employee to pay someone else to complete their work. On the other hand, when you engage a contractor it is fine to allow the contractor to subcontract the work out.
Basis of payment
For an employee you will be paying them a set rate either for time worked or a price per activity regardless of what the outcome is. On the other hand a contractor will be paid to achieve a certain result without any consideration to time.
Equipment, tools and other assets
When you have an employee, as the employer you will be required to provide any tools and other assets that are required by the employee to complete their work. In comparison a contractor will generally provide all the tools and equipment required to complete the job.
When you have an employee, any risk in relation to incomplete or inadequate work falls on you the employer. When you hire a contractor, it falls on the contractor to fix any incomplete or inadequate work.
Control over work
In the case of an employee, the way the work is performed can be directed by the employer. However if they are a contractor, you will have no say in how the work is carried out subject to the conditions set out in the contract.
An employee will be considered part of your business and will not operate independently from you. A contractor however will be independent, operating within their own business.
Myths surrounding contractors
Over the years there have become “myths” surrounding the definition of a contractor. Some of these include:
- They have an ABN or running through a company therefore they are a contractor
- You have only employed them for a short period of time while work is busy so they must be a contractor
- Other people in the industry have only contractors, so anyone who works for me is a contractor
- The individual is a contractor for someone else so they will be a contractor for me too.
Please note that these “myths” are just that and do not impact on the employee or contractor status.
As you can see, the difference between a contractor and employee is not clearly defined and it will depend on the facts in each specific case. These are just a list of general factors to consider when determining which category is appropriate.If you have questions regarding your specific circumstances please contact your advisor at The Practice on (03) 8888 4000.