Employee vs Contractor
What are the differences between a person being an employee or a contractor? Many business owners ask me this question. This article should help clarify some of your concerns.
It is important that you understand the differences as a number of government organisations are continually reviewing these arrangements to ensure working people are treated fairly and receive all the benefits they are entitled to. Fair Work Australia, ATO and Workcover are regularly involved with small business audits. I have assisted clients during these audits to determine the best arrangements possible.
Getting it wrong can have serious consequences for your business!
What is an employee?
Generally an employee is someone who is employed by a business to provide their labour. Employees can be employed on a permanent, casual or fixed-term basis, working either full-time or part-time hours.
The factors that indicate that someone is an employee include:
- doing ongoing work that is controlled by their employer
- working hours they’re told to work by their employer
- employers providing major tools or equipment
- individual not being responsible for financial risk
They are therefore entitled to:
- superannuation from their employer
- minimum wages and overtime or penalty rates
- have income tax taken out of their pay
- be paid regularly (weekly / fortnightly / monthly)
- paid leave if they are permanent employees.
What is an independent contractor?
An independent contractor is a person who contracts their labour or expertise to others to provide services and to achieve a particular result or complete a particular project. They:
- decide how to do their work and what skills they need to complete the project
- decide whether to employ someone else to do their work
- carry the risk of making a profit or loss
- pay their own superannuation and tax, including GST
- have their own insurance
- are contracted to work for a set time or do a set task
- decide what hours to work
- invoice for their work or get paid at the end of the contract or project
- do not receive paid leave.
A contractor is different to an employee because the contractor must run their own independent business, separate from the person who engages them. For that reason, a contractor can service many different clients (often at once), and can advertise their services to the public at large.
As a business owner, what are the potential penalties for me if I fail to properly classify someone?
If you treat someone as a contractor when they are properly classifiable as an employee, there are a number of consequences (most of which are expensive):
- Taxation – if you have failed to withhold PAYG for a worker, the Commissioner of Taxation has strong powers to seek recovery of the amount that should have been withheld.
- Superannuation – you will have to pay any unpaid SGC for a worker that should have been classified as an employee. There will also be interest and penalties imposed.
- Pay and leave entitlements – you will be liable to pay the worker an amount equal to what they would have received under the NES or the relevant modern award, including back pay for leave entitlements and overtime that would have ordinarily have accrued during the period of employment.
- Workers compensation – if you fail to register for the relevant state workers' compensation scheme, there can be significant financial penalties per worker. For late payment of premiums you may also be subject to significant fines as well as interest charges.
- Payroll tax – any payroll tax liability that would have otherwise been incurred will be payable, together with any interest and penalties assessed.
- Fair Work prosecution – Fair Work Inspectors can seek the imposition of penalties for scam contracting arrangements. You could also be exposed to unfair dismissal claims through the Fair Work Tribunal.
This area is undergoing increased scrutiny from a number of organisations and it is important that you get the classification correct as it is not worth the risk. Even if someone is potentially an employee and asks to be a contractor this does not alleviate you of the responsibility of getting it right.
To avoid finding yourself in an awkward financial situation, do not hesitate to contact me and clarify where you should be employing a person or offering them a contract.