Contractors vs Employees

ATO penalties and charges may apply if employees are incorrectly treated as a contractor

When engaging a new worker, you should ensure that they're classified as an employee or contractor before entering into any agreement or contract. As an employee, a worker has additional entitlements such as Superannuation, Annual Leave, Sick Leave and Long Service Leave.

If you've previously engaged a worker, you may wish to review your classification for that worker. The following ATO employee/contractor decision tool may be of assistance to you in determining if your worker is an employee or contractor for super and tax purposes and can be found on the following website:

https://www.ato.gov.au/Calculators-and-tools/Employee-or-contractor/

In summary, the following table outlines the differences between employees and contractors:

Indicator Employee Independent Contractor

Degree of control over how work is performed

Performs work, under the direction and control of their employer, on an ongoing basis.

Has a high level of control in how the work is done.
Hours of work Generally works standard or set hours (note: a casual employee's hours may vary from week to week). Under agreement, decides what hours to work to complete the specific task.
Expectation of work Usually has an ongoing expectation of work (note: some employees may be engaged for a specific task or specific period). Usually engaged for a specific task.
Risk Bears no financial risk (this is the responsibility of their employer). Bears the risk for making a profit or loss on each task. Usually bears responsibility and liability for poor work or injury sustained while performing the task. As such, contractors generally have their own insurance policy.
Superannuation Entitled to have superannuation contributions paid into a nominated superannuation fund by their employer. Pays their own superannuation (note: in some circumstances independent contractors may be entitled to be paid superannuation contributions).
Tools and equipment Tools and equipment are generally provided by the employer, or a tool allowance is provided. Uses their own tools and equipment (note: alternative arrangements may be made within a contract for services).
Tax Has income tax deducted by their employer. Pays their own tax and GST to the Australian Taxation Office.
Method of payment Paid regularly (for example, weekly/fortnightly/monthly). Has obtained an ABN and submits an invoice for work completed or is paid at the end of the contract or project.
Leave Entitled to receive paid leave (for example, annual leave, personal/carers' leave, long service leave) or receive a loading in lieu of leave entitlements in the case of casual employees. Does not receive paid leave.

For more information on if a worker is a contractor or employee can be obtained on the following website:

https://www.ato.gov.au/Business/Employee-or-contractor/When-to-check-if-workers-are-employees-or-contractors/

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