Contractor or Employee?

As an employer it is essential that you are aware of your obligations because if you are not, the penalties can be substantial. You must be aware when your worker is an employee and when they are a contractor because contractors and employees have different tax and superannuation obligations.

This determination in itself is not as straight forward as it sounds, therefore I would suggest you consider the following table.

Are you, or is your worker an employee or a contractor?
Factors to consider	Employee	Contractor
Control over work	The employer has an implied right within industrial law to direct and control the work of an employee. The employee works in the business of the employer and the employer is free to manage their business as they see fit.	A payer has a right to specify how the contracted services are to be performed. However, such control must be specified in the terms of the contract, otherwise the contractor is free to exercise their own discretion.
Independence	An employee performs work for the employer in accordance with an employment contract.	A contractor performs services as specified in a contract with the payer and provides additional services only by agreement
Payment	Payment is often based on the period of time worked, but an employee can also work on ‘piece rates’ or commission.	Payment is dependent on the performance of the contract services
Commercial risks	An employee generally bears no legal risks in respect of the work; since the employee works in the business of the employer, the employer is legally responsible for any work performed by the employee	A contractor bears legal risk in respect of the work. They have the potential to make a profit or loss, and must remedy and defective work at their own expense.
Ability to delegate	An employee performs the work personally and generally cannot subcontract the work to someone else.	Unless otherwise specified in the contract, a contractor can sub-contract or delegate the work.
Tools and equipment	The employer, except when specifically agreed otherwise, usually provides tools and equipment.	Generally, a contractor provides their own tools and equipment.

A key factor in deciding if a worker is an employee is the degree of control that can be exercised over the worker. For example, if the payer has the right to direct how, when, where and who is to perform the work, the worker is likely to be an employee.

Another key factor to consider is whether the worker is being paid for the time they work, or if they are being paid for a result. Workers being paid by the hour are more likely to be employees. Workers being paid for a result are more likely to be independent contractors.

These are a number of factors to consider in determining whether a worker is an employee or a contractor, with no one factor necessarily conclusive. You must consider all the facts in each case.

Most contractors provide for their tax obligations through the pay as you go (PAYG) instalments system. A contractor should also be aware of the tax implications if some or all of your income is considered personal services income.

If you engage contractors, you are not required to withhold amounts from payments except where:

The contractor has not quoted their Australian business number (ABN) to you
A contract worker you engage provides their work or services for your client under a labour hire arrangement between you and the client, or
You have entered into a voluntary agreement with the contractor to withhold them from payments. Voluntary agreements can help your contractors to meet their PAYG tax obligations.

For individual contractors, you must also make super guarantee contributions for them if more than 50% of the value of their contract is for labour.