What is the difference between an employee and a contractor? Make sure you know this

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The difference between an employee and independent contractor is not always clear. When running a business, it is important to differentiate between the two, because independent contractors have different rights and obligations to employees. Independent contractors provide services to another person or business, as opposed to being employed by that person or business. 

Whether a worker is an independent contractor or an employee is determined by the nature of the relationship, not what the arrangement is called. There are several indicators that may assist in determining whether a person is an independent contractor or an employee. Although the following factors provide an indication of the nature of the relationship, they are not exhaustive. 

Independent contractor

Indicators that an individual is an independent contractor include where the individual:

  • has a high level of control over how work is performed;
  • decides on specific hours to be worked, where the number of hours worked is dictated by an agreement;
  • is engaged to complete a specific task and has no ongoing expectation of work once that task is to be completed;
  • bears the financial and legal risk for each task, and usually has their own insurance policy;
  • pays their own superannuation;
  • provides their own equipment for the task;
  • pays their own tax and GST to the Australian Tax Office;
  • has their own ABN and submits invoices for payment; or
  • is not entitled to paid leave.


Indicators that an individual is an employee include where the individual:

  • performs work under the direction and control of the employer;
  • works set hours;
  • has an ongoing expectation of work;
  • bears no financial risk;
  • is entitled to superannuation contributions which are paid by their employer;
  • is provided with tools and equipment necessary for tasks performed;
  • has income tax deducted by their employer;
  • is paid on a regular basis; or
  • is entitled to receive paid leave.

Sham contracting

A sham contracting illegally occurs when an employer misrepresents the nature of the relationship between the business and the independent contractor or employee. Sham contracts can be created recklessly, but are often created knowingly by employers.Often times, the employer does so to avoid paying employee entitlements such as superannuation, leave, penalty rates and notice of termination.

Engaging in sham contracting is illegal and penalties can be imposed by the courts. Under the sham contracting provisions, it is illegal to:

  • tell an employee they are an independent contractor;
  • say something misleading to convince an employee to do the same work for the employer but as an independent contractor;
  • dismiss or threaten to dismiss an employee if they do not become an independent contractor; or
  • dismiss an employee and hire them as an independent contractor to do the same work.

If you are engaging employees or independent contractors, you should seek legal advice. This is particularly true if you are unsure of the difference between an employee and a contractor. Legal Kitz business specialists can assist with ensuring that your employment agreements are drafted to avoid disputes from vague terminology or missing essential clauses. Legal Kitz also ensures  you are compliant with the relevant laws and regulations. 

Book a free consultation with one of our highly experienced solicitors today or contact us at info@legalkitz.com.au or by calling 1300 988 954. 

The above information has been collected from relevant government websites and is subject to change. For the latest information regarding new or amended legislation, please refer to state and federal government websites. 

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