April 2019

Are you hiring an employee or a contractor? This is an important question often overlooked by business owners.

What is the difference between an employee and a contractor?

The difference between an employee and an independent contractor is based on many different factors. No single factor determines whether someone is an employee or a contractor. Instead, the Courts will look at each case and make a decision based on the totality of the relationship between the parties when determining the status of an engagement.

There are some common factors that may contribute to determining whether a person is an ‘employee’ or an ‘independent contractor’ (or ‘contractor’ or ‘sub-contractor‘):

Employees

Employees generally:

• do not operate independently of the business engaging them
• are directed in how and when to perform their work
• cannot delegate their work to someone else or pay someone else to do it
• are paid per hour, project or a commission
• are provided with all tools and equipment required to perform their work or gets an allowance to provide these things
• take no commercial risks – the business is responsible for the work performed or fixing any issues with it
• have an expectation of continuing work (except casuals)
• are generally not employed by other businesses at the same time (at least for most full time employees)

Contractors

Contractors on the other hand:

• do operate independently of the business engaging them
• have freedom as to how and when to perform work, subject to the terms of the arrangement
• may delegate or further subcontract out their work, subject to the terms of the agreement (Services Agreement or Contractor Agreement etc)
• are paid for a result or outcome, even if this is on an hourly rate basis, a commission arrangement or per project
• supply most of their own tools and equipment
• are liable for the work performed and are liable to remedy or pay the costs of fixing any defects
• are responsible for their own employees and sub-contractors
• are usually engaged for a specific task or purpose
• may accept or seek work from other businesses

Other differences in their rights and the obligations or the employer or principal include:

• Independent contractors issue invoices (or tax invoices if registered for GST) whereas employees are paid regularly (weekly, fortnightly or monthly).
• Employees are entitled to the benefit of the rights under the Fair Work Act 2009 (Cth) (FW Act) and any relevant Award or industrial agreement (including for things such as leave, overtime etc) as well as having the compulsory superannuation contribution paid to their superannuation fund.
• Employees have tax withheld and paid on their behalf to the Australian Taxation Office where as an independent contractor will pay their own tax to the ATO (and GST if registered for GST).

What if you get it wrong?

If you pay someone as a contractor when they are really an employee, the employee may miss out on important benefits such as leave entitlements and superannuation. Although you may have paid the agreed rates or price and any applicable GST, the employee may be able to pursue the business that engaged them for those unpaid entitlements and the employer may be prosecuted. Also, if the “contractor” doesn’t pay tax, the employer may be liable for the tax that ought to have been withheld.

Many businesses that deliberately arrange in “sham contracting” (where a person ought to be an employee but they are engaged and remunerated as a contractor) are penalized by the Fair Work Ombudsman under the FW Act.

Another unexpected consequence can be that where those engaged as independent contractors are not actually independent at all (for example where they do not provide services to any other businesses) or are really employees can be the issue of payroll tax payable to Revenue NSW under Payroll Tax Act 2007 (NSW). Contractors can be deemed employees for the purpose of payroll tax if they don’t offer their services to the general public, working only for one business.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to any employment related issue or any business/commercial law matter, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your needs.

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