What is the difference between an employee and a contractor, and does it matter? The Australian Tax Office describes an employee as someone who works in your business and is part of your business. A contractor is running their own business. But it’s not as simple as it sounds.
Your tax, super and other obligations will vary depending on whether your workers are employees or contractors and it’s against the law to wrongly treat an employee as a contractor. It’s worth checking because if you don’t get it right, you could be facing heavy penalties.
Some workers are always considered employees, such as apprentices, trainees, labourers and trade assistants. Employees must be people. If you’ve hired a company, trust or partnership to undertake work, that is a contract relationship for tax and super purposes. If you have sourced workers through a labour hire company, and you pay the company for the work, they are responsible for those obligations. If you’ve hired an individual, it’s the details of the working agreement which will determine if they are a contractor or an employee.
There are a few factors when taken together, that determine whether a worker is an employee or contractor for tax and super purposes.
Do they have the ability to subcontract or delegate work? An employee cannot pay someone else to do their work, whereas a contractor has this right.
How are they paid? If the worker is paid for their time worked, or a commission, or a price per item, they are considered an employee. If they are paid to achieve a result based on a quote they provided, they are a contractor.
Who supplies their tools and equipment? If you supply all or most of a worker’s tools, or they supply their own, but you pay a reimbursement, they are an employee. A contractor would supply all their own equipment, and you do not pay them a reimbursement or allowance.
Are you in control of the workplace? Employees are directed by you to work as directed, but contractors have the freedom to determine how any work is done subject to their contract.
Myths about employees vs contractors
Myth: If a worker has an ABN they’re a contractor. FALSE: Having an ABN makes no difference to whether a worker is an employee or contractor for a job. If the working arrangement is employment, an ABN will not make the worker a contractor.
Myth: Employees can’t be used for short jobs or to get extra work done during busy periods. FALSE: The length of a job or regularity of work does not influence whether a worker is an employee or contractor. Both can be used for casual, temporary, on-call and infrequent work busy periods, short jobs, specific tasks and projects.
Myth: My business has always used contractors, so we don’t need to check whether new workers are employees or contractors. FALSE: Unless a working arrangement (including the specific terms and conditions under which the work is done) is identical to a previous arrangement, the outcome could be different.
Myth: If a worker has a registered business name, they’re a contractor. FALSE: Having a registered business name makes no difference to whether a worker is an employee or contractor.
Myth: My business should only take on contractors, so we don’t have to worry about super. FALSE: Businesses may be required to pay super for their contractors. If you pay an individual contractor under a contract that is wholly or principally for the person’s labour, you have to pay super contributions for them.
Myth: If a worker submits an invoice for their work, they’re a contractor. FALSE: To know whether a worker is an employee or contractor, you need to look at the whole working arrangement and examine the specific terms and conditions.
To determine if your workers are employees or contractors, you need to review your whole working arrangements. The ATO has an online tool to help with this process.
The Decision Tool will help you work out if your worker is an employee or contractor for tax and super purposes.
What will I do next?
Once you determine if your workers are employees, you must:
- withhold tax (PAYG withholding) from their wages and report and pay the withheld amounts to the ATO
- pay super, at least quarterly, for eligible employees
- report and pay fringe benefits tax (FBT) if you provide your employee with fringe benefits.
If your workers are contractors instead:
- you won’t have to withhold from payments to them, although this is not the case if they don’t quote their ABN to you, or you have a voluntary agreement with them to withhold tax from their payments
- you may still have to pay super for individual contractors if the contract is principally for their labour
- you don’t have FBT obligations.
It should be noted that under work health and safety laws, businesses have different obligations when it comes to the definition of a worker. A worker is a person who carries out work in any capacity for a business or employer or ‘person conducting a business undertaking’ (PCBU) They can be an employee, a trainee, apprentice or work experience student, a volunteer, an outworker, a contractor or sub-contractor, an employee of a contractor or sub-contractor, an employee of a labour hire company.
While at work, all workers must take reasonable care for their own health and safety, as well as others and must comply with any reasonable instructions, policies and procedure given by their employer, business or controller of the workplace. This includes contractors, regardless of any other contractual agreements with a business.
For more information, visit the ATO at ato.gov.au and the work health and safety regulator in your state or territory.