The table below explains the criteria and characteristics of both a contractor and an employee:
| Contractor | Employee |
| Remuneration – Paid for a result achieved or based on a quote provided (quote can be based on hourly rates or price per item) | Remuneration – Usually paid either by time worked (hourly rate), price per item/activity or a commission. |
| Ability to delegate – Worker can subcontract/delegate the work to someone else and pay them to do it. | Ability to delegate – Worker is unable to subcontract/delegate the work to someone else and cannot pay someone else to do it. |
| Tools & Equipment – The worker provides all or most of the tools/equipment needed to complete the work & does not receive any allowances or re-imbursements for the cost of tools/equipment | Tools & Equipment – The business they work for provides all or most of the tools/equipment needed to complete the work or the worker provides the tools but receives an allowance or re-imbursement for the tools/equipment. |
| Risk / Insurance – The worker takes on all commercial risk, they are legally responsible for their work and liable for any rectification costs to fix any defects in their work. | Risk / Insurance – The payer’s business has the legal responsibility for any work performed, the cot of rectifying any defects is the responsibility of the payer. |
| Control over work – The worker has the freedom to choose how the work is performed or completed, subject to any terms within the contract or agreement. | Control over work – The payer has the right to direct the way in which the worker carries out their activities. |
| Independence – The worker operates their own business and is seen to operating independently. The workers only obligation is to that in the contract or agreement between the parties. | Independence – The worker is not operating independently of the payer’s business. They work within and are considered a part of the payer’s business. |
The classification of an individual as an employee or a contractor can have ramifications for both the individual and those who pay for their services.
If a contractor is classified as an employee or if the contractual agreement is principally for their labour the payer of the services may have superannuation responsibilities for that individual. The categorising of an individual as an employee may also affect workcover and other insurance liabilities.
If an individual is categorised as a subcontractor, they are required to have their own ABN they are responsible for their own tax and super obligations. (except if the contract is principally for their labour)
If an individual has been deemed as a contractor then it is of utmost importance that this individual has an ABN. If an individual does not have an ABN or has not provided the payer with their ABN the payer is required to withhold at the top tax rate and pay to the ATO.
The wrong classification of an individual is an offence, penalties and charges may apply. If you are unsure or would like to review this the ATO has a fantastic decision making tool that takes about 2 minutes to complete and all information is general and confidential, see below:
https://www.ato.gov.au/business/employee-or-contractor/how-to-work-it-out–employee-or-contractor/
If you would like to discuss this further please feel free to get in contact with us via our contact us section on our website.