A business owner’s obligations vary depending on whether a work is an employee (working directly for the business) or a contractor (Australian Business Number-registered and working for themselves). There are different statutory and common law obligations and consequences depending on how a worker is classified. It’s important to get this distinction right, or otherwise the Australian Tax Office and Fair Work Australia can penalise a business.
So, what’s the difference between an employee and a contractor? A person who enters into a contract of service is an employee and a contract for services are an independent contractor. Even where a written contract states a relationship is not one of employment, this is not determinative. Unfair dismissal terms do not apply to contractors, while employees must be paid superannuation contributions. Employees covered by the Fair Work Act 2009 (Cth) also have various other entitlements, including minimum wages and leave, but contractors must manage their own taxation and superannuation.
Still not sure whether the relationship is employment-based or contract for services? Try using this checklist:
- Control over work – Does the worker have the discretion to choose the place and hours of work? A contractor does, while an employer generally does not.
- Equipment – Is the provision and maintenance of tools and equipment the responsibility of the business? A contractor would likely supply and maintain their tools of the trade.
- Sub-contracting – An independent contractor usually reserves the ability to delegate work to others, while an employee cannot normally subcontract their role.
- Income taxation deductions – Does the hirer deduct taxation from the worker’s pay? This indicates employee status, with the employer required to pay payroll tax.
- Remuneration – Payment on submission of invoices suggests an independent contract.
- Holidays and sick leave – These are an entitlement of an employee.
- Business expenditure – Substantial expenditure by the worker, as a proportion of total income, can indicate an independent contractor.
When considering the difference between an employee or contractor, a Court generally looks at the relationship on the whole and makes a decision on balance of all the factors.
In addition, there are differences between the types of contract employees and contractors enter into. An Employment Contract is an agreement (either verbal or written) between employer and employee, outlining the terms and condition of employment; while a Contractor’s Contract is an agreement between a company (the ‘principal’) and a service entity (the ‘contractor’). Both contracts address different legal requirements of each party, including term and payment; insurance, taxation, superannuation and reporting; subcontracting, exclusivity and restraint and termination provisions.
Other considerations include: sham contracting, an illegal practice whereby a person working as an employee is told they are an independent contractor when they are not; that apprentices and trainees are considered employees for tax and superannuation purposes; and, if a contractor doesn’t provide an ABN, the principal is required to withhold 46.5% of any payments and report these to the ATO. Contractors not registered for GST should not charge GST.
Fred Kalouche & Associates can provide you with tailored legal advice.
Contact us on 02 8062 6300.