Employee vs Contractor — What’s the difference?

You are legally obligated to be entitled correctly. Previously, determining the difference between employees and contractors involved a close look at the whole relationship between the individual and employer. However, recent changes to the law now means that the most important element of determining whether one is an employee or a contractor is the contract between the employer and worker. Misrepresentation such as sham contracting may result in severe penalties. This article will outline the key differences between employees and contractors, broken into several components.

Working Hours

With the exception of casual employees, regular and defined working hours typically characterise an employee's schedule. Conversely, contractors often enjoy the flexibility of determining their work hours to fulfil their designated responsibilities. Nonetheless, a contractor agreement might outline specific work hours as part of the arrangement.

Control Over Work

Employees usually operate within the guidelines and instructions set by their employers. In contrast, contractors maintain a significant level of autonomy regarding how they execute their tasks, encompassing the methods employed to fulfil their work requirements.

Commercial and Financial Risk

Employees typically bear no commercial or financial risk related to their work, as it's the employer who ultimately shoulders such responsibilities. Conversely, contractors assume the risks associated with profit and loss. Additionally, they hold accountability for liabilities or defects that may arise. Consequently, it's common for contractors to secure their own insurance coverage to mitigate potential risks.

Expectation of work

Furthermore, employees, including certain casual workers, can anticipate consistent and structured work arrangements. In contrast, businesses typically enlist contractors for distinct tasks, with no expectation of continued engagement for additional work beyond the specified assignment.

Method of Payment

Employees usually receive regular payments, whether on a weekly, fortnightly, or monthly basis, as compensation for their time, regardless of their performance. On the other hand, businesses pay contractors for specific completed tasks, as per the quoted agreement. Contractors invoice for their services and often hold an Australian Business Number (ABN). Their payment is contingent upon the delivery of results or completion of designated milestones.

Superannuation

Employees receive superannuation contributions from their employer to their nominated super fund. Conversely, contractors typically manage their own superannuation payments, though exceptions exist.

A contract might be deemed ‘wholly or principally for labour’ if the contractor:

- Is compensated primarily for their personal labour and expertise.

- Receives payment per hour worked rather than for completing a specific project.

- Personally performs the contracted work.

Tax

Employees typically have their taxes deducted through systems like pay-as-you-go (PAYG), managed by their employer. In contrast, contractors are responsible for paying their income tax directly to the Australian Taxation Office (ATO). Additionally, contractors might be required to remit Goods and Services Tax (GST) to the ATO under specific circumstances.

Leave Entitlements

Employees enjoy various leave entitlements such as annual leave or carer's leave, while casual employees receive casual loading in lieu of these entitlements. However, contractors do not receive any leave benefits. This absence of leave highlights the importance for independent contractors to prioritise obtaining their own insurance coverage.

Right To Delegate Tasks

Employees typically cannot delegate their duties, although there might be instances where they can delegate tasks to other employees. Nonetheless, they remain primarily responsible for their assigned work. In contrast, contractors usually possess the authority to delegate or subcontract their work, unless such arrangements are prohibited by the terms outlined in the contractor agreement.

Sham Contracting
In the scenario where a hirer engages someone as a contractor, but the work conditions closely resemble those of an employee, it could constitute a sham contracting arrangement.

A sham contracting arrangement occurs when an employer disguises an employment relationship as a contractor arrangement, often to evade taxes and responsibilities toward employee entitlements such as minimum wages, superannuation, and leave.

It's unlawful for an employer to:

• Misrepresent an employment relationship as an independent contractor agreement.

• Dismiss or threaten to dismiss an employee to engage them as a contractor.

• Provide false information to persuade an employee to become a contractor.

Courts can impose penalties against businesses or individuals for sham contracting. The maximum penalty is $18,780 for individuals and $93,900 for corporations, per contravention

If you have any questions regarding employment law, do not hesitate to call us at (02) 9170 0899 and we will do our best to assist you.