Differentiating Contractors and Employees

Does your business use contractors? The practice of deeming someone a contractor instead of an employee certainly reduces employer liability, but it can increase your legal exposure if the laws aren’t followed, if you inadvertently treat a contractor like an employee and don’t provide the relevant employee benefits and protections.

It can be difficult to determine whether a worker is an employee or an independent contractor and there are a number of factors you will take into account. A good indicator is the level of control you have over the worker, as generally, employers have a higher level of control over the way their employees perform tasks under an employment contract than they do over independent contractors.

Here are a few general principles to help you the distinction between contracting and traditional employment :

Employee	Contractor
An employee can be told when, where, and how to work	Free agent sets own hours, duration, place of work
An employee can be told to be available at specific times and engage in specific tasks at specific times. You can indicate specific times that specific tasks will be performed.	You agree on mutually acceptable deadlines – time frames are agreed, not dictated. Depends on availability and other workloads the contractor may choose to take on
An employer can dictate work methods and the manner of work to an employee, such as whether the work gets done all at once or in parts, or whether the person works on one project at a time.	You agree on mutually acceptable deliverables and outcomes, not method and manner. A contractor can take as much or as little work from whatever sources they see fit.
An employee cannot sub contract or pay someone else to do the work	A contractor is free to subcontract the work to someone else
The employer provides all or most of the equipment required	The contractor provides all or most of the equipment required and does not receive and allowance or reimbursement of costs
You can require an employee to attend various meetings	A contractor cannot be required to attend meetings, but can be invited.
The employer is legally responsible for the work performed by the worker, and liable for the cost of rectifying any defects	The contractor is legally responsible for their work and liable for the cost of rectifying any defect in their work.
You can prevail upon an employee’s specific use of time and where and when they work. You can require an employee take vacations at certain times, etc.	A contractor is free to accept or refuse work from whatever source they choose, work any time of the day or night, take holiday leave at their discretion.

Irrespective of the worker’s status as employee or contractor, there are still circumstances in which they may need to be treated as an employee.

Superannuation Superannuation Guarantee obligations will arise if the contract between you and the worker is wholly or principally for labour performed. A contract is wholly or principally for labour performed if the value of the labour component of the contract is more than 50% of the value of the contract as a whole. The issue will generally arise only where the worker is a sole trader providing tax invoices bearing an ABN for their services.

WorkCover Generally, workers’ compensation legislation in each State or Territory requires you to pay workers’ compensation premiums in respect of any ‘worker’.  In some circumstances, the legislation also treats contractors as workers. So, even if your worker is classified as a contractor, legislation may require you to ensure the worker is covered by a workers’ compensation policy.

Payroll Tax is payable for ‘wages’, and in some circumstances, payments to contractors are treated as wages for the purposes of payroll tax. For example, if a contractor only has one client other than you in a financial year, it is likely that you will have to treat the contractor the same as your employees and include the payments you make to the contractor in your payroll tax return.

Health and Safety As an employer, you are responsible of the health and safety of all workers under your management and control, regardless of whether they are classed as employees or independent contractors.

Discrimination As an employer or principal, you will be held ‘vicariously’ liable for acts occurring in your workplace even if you had nothing to do with the acts in question. This is regardless of whether the worker involved is your contractor or your employee , and this liability will exist unless you can demonstrate that you took reasonable precautions to prevent the acts from occurring.

If you are unsure of your employee’s status, or would like more information on contractors and employees, please contact Annette at End2End Business Solutions on (02) 8977 4002 for a customised solution.