The difference between contractors and employees
With the rise of the gig economy, Australia is seeing a significant proportion of the workforce take up contracting instead of permanent employment.
This shift involves a transfer of obligations from the employer to the contractor who must look after all their own finances, superannuation and other responsibilities.
It is also becoming an area of higher scrutiny with both the Fair Work Ombudsman and Australian Taxation Office (ATO) seeing the misclassification of employees as contractors as a persistent issue.
Employment law is governed by two distinct regulatory frameworks:
- Income tax (Income tax Assessment Act 1997) as regulated by the ATO
- Employment law (Fair Work Act 2009) as regulated by the Fair Work Ombudsman.
This article will focus primarily on the income tax elements. For employment law considerations, we recommend you speak to an appropriate HR lawyer.
What is an employee?
An employee is someone who works for a business to perform a specific duty in an open-ended, permanent working arrangement. The employee is expected to complete their role and their employer in return will take care of their wages, superannuation, payroll tax, sick and annual leave.
What is a contractor?
Contractors are typically self-employed workers, also known as a sole trader, engaged by a company or individual for a specific task, which they often do for an agreed price and within a specified time frame.
No single factor is used to determine whether a worker is an employee or an independent contractor. A worker may have an Australian Business Number (ABN) or issue invoices, but that does not automatically make the worker an independent contractor.
Each determination is based on the individual merits of the work arrangement, so consider the relationship between the parties when determining the status of a person’s employment.
|Ability to subcontract/delegate: the worker cannot delegate or pay someone else to do the work.||Ability to subcontract/delegate: the worker can delegate or pay someone else to complete the work.|
|Payment: the business pays the worker for their time worked; a commission; or a price per activity or item.||Payment: the worker is paid for a result achieved based on the quote they provided.|
|Equipment, tools and other assets: the business provides all or most of the equipment, tools and other assets required to complete the work. Otherwise the worker provides equipment and their employer provides them with a tool allowance.||Equipment, tools and other assets: the worker provides all or most of the equipment, tools and other assets required to complete the work.|
|Commercial risks: the business is legally responsible for the work done by the worker and liable for the cost of rectifying any defect in the work.||Commercial risks: the worker takes commercial risks, making them legally responsible for their work and liable for the cost of rectifying any defect in their work.|
|Work control: the business can direct the way in which the worker does their work.||Work control: the worker can complete the work in their preferred way, subject to the terms in the contract.|
|Independence: the worker is within the business and are considered part of the business.||Independence: the worker is operating their own business independently.|
Which workers are always employees?
Some workers are always treated as employees, including apprentices, trainees, labourers and trade assistants. Apprentices and trainees do a combination of work and recognised training to get a qualification, certificate or diploma.
Companies, trusts and partnerships are always contractors
An employee has to be a person, so companies, trusts and partnerships must complete any work through a contracting relationship for superannuation and tax purposes.
While the people who complete the work may be the directors or employees of the contracting business, they are not your employees.
In some circumstances, a business may engage an individual as a contractor, but still may need to pay their superannuation contributions. This can happen even where a written contract with them does not state this, regardless of ABN status. This goes back to the ATO’s definition of an employee and employer requirements and obligations.
Consequences of misclassification
Potential ATO charges and penalties include a PAYG withholding penalty for not meeting PAYG withholding obligations and a Super Guarantee Charge for not meeting super obligations. The Super Guarantee Charge is made up of:
- super guarantee shortfall amounts (amount of super contributions that should have been paid into a complying fund);
- an administration fee.
How LDB can help
Whether you’re an employee or contractor, work arrangements can be complex, so it is important to have the appropriate support to ensure everything remains compliant.
LDB has experience with assisting businesses to navigate everything from setting up the appropriate structures for contractors to classification for businesses and all associated advice.
To find out more, give us a call (03) 9875 2900 or fill out the contact form below and we’ll be in touch.