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What is the difference between an Employee and a Contractor

When engaging someone to work for you as a contractor, it is important to understand the sometimes fine line that differentiates that contractor from being an employee.

Getting it wrong can be expensive.  Not only are there penalties under legislation, but employers can be made to pay back payments and superannuation.

Sometimes it is difficult to establish whether someone is a contractor or employee. As with most most business arrangements, a well drafted contractor agreement whereby both parties acknowledge the relationship of contractor, goes a long way in confirming this relationship and eliminating misundrestandings.

That is not to say that you can deem any relationship one of a contract for services simply by putting it in writing.  Disguising an employee as a contractor carries severe penalties and is considered unlawful.

So what defines an independent contractor?

There is no single definition as to what constitutes a contractor.

Whilst a contract will be an important part of assessing the relationship between the parties, the Court will also look beyond the contract and have regard to the totality or the substance of the relationship.

In particularly, those things that point towards an independent contractor are that an independent contractor:-

  • performs the work as an entrepreneur who owns and operates his or her own business;
  • works for the Principal as a representative of the contractors own business venture and not as a representative of the Principal’s business;
  • advertises his or her services to the public;
  • holds his or her own insurances;
  • has the ability to determine the manner in which the work is completed;
  • has the ability to sub-contract the work out to others;
  • has his or her own tools and equipment to perform the work;
  • has the ability to accept or refuse work as it becomes available;
  • is generally paid on a results basis or piecemeal basis rather than on a time basis;
  • decides what hours to work to get the job done;
  • submit invoices for work completed or is paid at the end of the contract or project.

In contrast, employees perform their work under the direction and control of their employer, and (with the exception of casuals) on an ongoing basis with standard set work hours.

Employees are entitled to benefits such as superannuation and paid leave.

If you are unclear about whether a Principal and Contractor relationship exists, a good starting point is the ATO’s Contractor Tool