The status of your staff is an important distinction. Whether they are employees or independent contractors, both have consequences for the worker and the business owner.
An employee can seem to be set up in the workplace in a similar way to a contractor, but generally employees are supplied with all they need to do their job, don’t make a profit or loss from work carried out (just a wage or salary), and will be expected to perform certain duties as agreed and work hours set out in their employment contract. They will also have access to leave entitlements such as sick leave and annual leave.
Contractors usually run their own business and are contracted to achieve a result. They can often set their working hours and arrangements and set their fees in order to make a profit on each specific job. They could also work for a variety of clients at one time.
Defining a contractor vs. an employee
To work out whether a worker is an employee or contractor, you need to look at the whole working arrangement including the specific terms and conditions under which the work is performed. Consider the following factors:
Ability to sub-contract/delegate
Does the agreement or contract give the worker the right to pay another person to do the work instead of them? An employee can’t sub-contract or delegate the work whereas a contractor can.
Basis of payment
Review the basis of the amount you agree to pay the worker. If it’s a set amount per period this is considered an employee. If you pay a price per item or activity, this is a characteristic of a contractor.
Equipment, tools and other assets
Review who is responsible for providing the equipment, tools and other assets (such as heavy machinery or motor vehicles) needed to perform the work. Employees are not responsible for providing the equipment, tools and other assets; whereas contractors are.
Does the worker bear any legal risk or are they liable for rectifying, at their own expense, any defect in the work performed? Employees don’t take commercial risks whereas contractors do.
Control over work
Do you control the way the work in your business is done, or whether the worker can decide the way the work is done (subject to any terms and conditions in the contract or agreement)? Employees don’t control the way the work is done, whereas contractors can decide the way the work is done.
Does the worker operate independently from your business? Employees do not operate independently away from your business whereas contractors do.
There is no single factor that will be conclusive in determining whether the worker is an employee or contractor, however, the implications of which definition they fall under can be significant in respect of superannuation ,payroll tax and workers compensation obligations.
The growth of the contractor
As legitimate contracting continues to grow, outsourcing is becoming the norm. To cover a spike of business, many employers look to taking on contracted workers. When the spate of extra work is completed, contractors can be taken off the books. This is a sensible way to cover a temporary shortfall in staff, as well as offer helpful temporary work to people who need it.
Contractors need to register for GST if their GST turnover is at, or above the GST turnover threshold of $75,000 (exclusive of GST).
Contractors may also have to include personal services income in their individual tax return if their contractor services are being provided to the client via an entity (and the contractor is an ’employee’ of that entity which has the contract with the end client).