When engaging a worker for your business, it is important to determine whether that worker is an employee or an independent contractor. It is critical to determine which relationship exists, as employees and contractors have different rights and entitlements that your business must provide and comply with. Incorrectly classifying an employment relationship as a contractor relationship may result in a range of liabilities for a business, including breaching protections against sham contracting arrangements under the Fair Work Act 2009 (Cth) and other issues such as underpayment.
What is an employee?
An employee is a person that is hired to provide a service to a company on a regular basis in exchange for payment.
What is an independent contractor or subcontractor?
In contrast, an independent contractor or subcontractor is a person who is self-employed and provides services to customers. A contractor is usually hired to complete a specific task, such as a tradesman working on a building project.
What are the indicators of an employment relationship?
There are several indicators that may assist in determining whether a person is an employee or a contractor.
Indicators that a person is an employee include where the person:
- 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
- Is entitled to receive paid leave
What are some indicators of a contractor or subcontractor relationship?
Indicators that a person is a contractor include where the person:
- 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
- Is not entitled to paid leave
Examining the relationship as a whole
Although these factors provide an indication of what type of relationship exists, they are not exhaustive. The relationship of the parties should be examined as a whole to determine whether the relationship is an employment relationship or a contractor relationship (see Abdalla v Viewdaze Pty Ltd t/a Malta Travel (2003) 122 IR 215, 34; On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3)  FCA 366, 189; Hollis v Vabu Pty Ltd  HCA 44).
Australian Taxation Office contractor vs employee tool
The Australian Taxation Office (ATO) provides a tool where you can answer questions about the working relationship and the tool will determine whether the information you have provided indicates that an employment relationship or a contractor relationship exists. The ATO contractor vs employee toll can be accessed by clicking the following link: https://www.ato.gov.au/calculators-and-tools/employee-or-contractor/.
We often recommend that clients complete the ATO tool, print and date the assessment results before they engage with either an employee or independent contractor so that they have a record of why they chose to either bring the worker on as an employee or independent contractor.
Unsure whether a contractor or employment relationship exists?
We have provided our Contractor vs Employee Checklist for free in our Knowledge centre, which will help you to distinguish whether your worker is an employee or a contractor.
However, this is a complex area and it may be necessary to seek legal advice in some circumstances. Our trusted partner Legal Kitz has a team of skilled solicitors who are experienced with employee versus contractor matters and provide you with specific advice regarding any potential issues, whether you are a worker or a business engaging a worker.