Employee or Contractor

Before you hire a worker you must first check if they will be characterised as an employee or contractor. This distinction is particularly important with respect to tradesmen and construction work and is of great practical effect as it will affect your tax, super and other obligations. Contractors are treated differently for tax purposes and you are usually not required to make superannuation contributions to them. If you wrongly treat your employees as contractors you risk having to pay penalties and charges. We set out a number of indicia that can assist you in differentiating between whether someone is an employee or contractor.

Companies, trusts and partnerships are always contractors: an employee must be a person. If you have hired a company, trust or partnership to do work for you, they will always be categorised as contractors. The people who actually do the work may be directors, partners or employees of the contractor but they are not your employees.

Some workers are always employees: some workers, by the very nature of their position are automatically classified as employees. Examples of workers who must be treated as employees include apprentices, trainees, labourers and trades assistants.

All other individuals: the result is not as clear in the case of individuals. In such cases (other than the types of deemed employees described above) you need to work out if they are a contractor or employee on a case by case basis. This will depend on the specific circumstances and the details of your working arrangement. No single factor is seen as being determinative of the employee vs contractor question, with a big-picture approach required to be taken. However, there are a number of accepted relevant factors that assist with the characterisation, as set out in the table below:

Factor Employee Contractor
Degree of control over work Performs work under the direction and control of their employer, on an ongoing basis. The employer has the right to control the way in which the work is performed. Has a high level of control in how the work is done, subject to specific terms in any contract or agreement.
Ability to delegate/sub-contract Cannot sub-contract or delegate the work. Cannot pay somebody else to do the work for them (unless authorised to do so by employer). Can delegate or sub-contract the work (although this may be subject to the principle’s consent).
Basis of payment Paid for the amount of time worked, a price per item or activity and/or a commission. Paid regularly (e.g. on a weekly or monthly basis) Paid for a result achieved based on a quote provided to and accepted by the principle. Submits an invoice for work completed or is paid upon completion of the work.
Tax Income tax deducted by employer. Pays their own tax and GST to the ATO
Superannuation Superannuation contributions paid into a nominated superannuation fund by their employer. Usually pays their own superannuation
Commercial Risks Takes no commercial risks. Employer is legally responsible for work done by their employee and liable for cost of rectifying any defect in the work. Takes commercial risks, being legally responsible for their work and liable for the cost of rectifying any defect in their work. Also bears the risk of making a profit or loss on each task.
Tools, equipment and other assets Tools, equipment and other assets required in order to complete work are generally provided by employer. Employee generally reimbursed for expenses incurred by in performing work, as long as they are authorised by the employer. Uses their own tools and equipment with no allowance or reimbursement.
Leave entitlements Entitled to annual leave, long service leave and sick leave Not entitled to paid leave.

You can also check out this helpful tool to assist you in working out how your worker should be classified.

Whether you are looking at hiring someone, or have previously hired someone without first checking whether the arrangement is employment or contracting, it is important to get expert advice in relation to this matter. Get in touch with the Warlows Employment team today for all your employment advice needs!