Not sure if you or your workers are a contractor or an employee?

Contractors and employees have different rights and obligations, so as an employer or worker it’s important to be clear on the distinction. In fact, getting it wrong can have far-reaching effects and be a costly experience due to fines and penalties.

The difference between an employee and an independent contractor can be difficult to assess and is based on many different factors. The table below outlines six of the factors that, when taken together, determine whether a worker is an employee or contractor for PAYG withholding tax and super purposes.

	EMPLOYEE	CONTRACTOR
BASIS OF PAYMENT	The worker is paid for the time worked, per item or activity, or by commission.	The worker is paid for a result achieved based on the quote they provided.
CONTROL OVER THE WORK	Your business directs the way in which the worker does their work.	The worker has the freedom over the way the work is done.
INDEPENDENCE	The worker works within your business and is recognised as a part of your business.	The worker operates their own business independently of yours and is free to accept or refuse work.
COMMERCIAL RISK	The worker takes no commercial risk and your business is legally responsible for the work done by the worker.	The worker takes a commercial risk and is legally responsible for their work including being liable for costs involved in rectifying their work.
ABILITY TO SUBCONTRACT/DELEGATE	The worker cannot pay someone else to do the work.	The worker is free to subcontract/delegate work to others.
EQUIPMENT AND TOOLS	Your business provides the equipment or tools necessary for the worker to complete their work or receives an allowance or reimbursement from your business for any equipment they require.	The worker provides all or most of the equipment or tools required to complete the work and does not receive an allowance or reimbursement for the cost of this equipment.

Companies, trusts and partnerships are always contractors

If you’ve hired a company, trust or partnership to do work for you, then this is a contracting relationship for tax and super purposes. The people who actually do the work may be directors, partners or employees of the contractor but they are not your employees.

Hiring individuals

If you’ve hired an individual, the details within the working agreement or contract will determine if they are a contractor or employee for tax and super purposes. The agreement or contract your business has with this worker can be written or verbal.

What if you get it wrong?

The misclassification of an employee as a contractor can be a costly experience for businesses and can lead to a number of different penalties:

PAYG Withholding – the ATO has the power to seek recovery of the amount of tax that should have been withheld and remitted on payments made, and will charge interest and penalties from the date the payment should have been made.

Superannuation – you will be required to back pay any SGC obligations on the payments made. Interest and penalties (of up to 200%) will also be imposed.

Pay and leave entitlements – you will be required to back pay if the amount paid did not meet the rates outlined in the Fair Work modern awards. In addition, you will be liable for any leave entitlements that would have ordinarily accrued during the period of employment.

Fair Work prosecution – failure to comply could lead to a Fair Work audit of your employment arrangements and also has the potential to expose you to unfair dismissal claims.

Contractors vs Employees decision tool

The ATO independent contractors decision tool can be useful for businesses to clarify what the working relationship is, and detail the tax and super obligations that need to be met. You can access the tool here – https://www.ato.gov.au/calculators-and-tools/employee-or-contractor/

Further help:

Are you still left wondering whether you’re doing the right thing? Contact Marsh & Partners for further advice or a review of your contractor arrangements. You can speak to our team on 07 3023 4800 or contact us at mail@marshpartners.com.au.

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