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Employee or Contractor?

Recently, the ATO have been targeting employers who do not meet their employer obligations for employees via increased audits.

Employees are entitled to the following payments from their employers:

  1. PAYG Withholding
  2. Superannuation
  3. Pay and Leave Entitlements
  4. Workers Compensation
  5. Payroll Tax

Individuals with ABN numbers may still be considered as employees instead of contractors. Any written agreement stating the nature of the relationship as employee or contractor is relevant but not conclusive. Taxation Ruling TR2005/16 states that a multi-factor test should be used to determine whether a person is an employee or contractor and weights given to particular facts will vary according to the circumstances.

Factors to Consider

Employee

Contractor

Control Over Work

Employer controls how work is performed and the job scope.

Payer may specify how work is performed and the job scope. If terms are not specified, contractors are free to exercise discretion.

Independence

Employees perform work according to employment contract.

Contractor performs work as specified in contract. Additional services are provided only by agreement.

Payment

Often paid for time worked (labour). May also work on commission.

Dependent on results achieved or specific outcomes.

Payment Method

Paid regularly.

Contractors have their own ABN. Contractors would usually invoice the company when work is completed or at completion of set milestones.

Commercial Risk

Employer is responsible.

Contractor is responsible.

Ability to delegate

Generally unable to delegate.

May subcontract or delegate work.

Natural person

Only natural persons can be employees.

May be natural persons, company or a trust.

Tools and Equipment

Provided by employer

Contractor provides their own tools

Representation of Business

Represents employer's business

Represents their own business

Benefits of being an employee includes:-

  1. Protection from Fair Work Ombudsman for unfair dismissals.
  2. Protected by minimum pay rates and minimum working conditions, according to the National Employment Standards (NES). Pay guides are accessible here.
  3. Provided for Leave Entitlements and covered by Worker's Compensation Scheme which differs in each state and territory.

Benefits of being a contractor includes:-

  1. Flexible working hours and location.
  2. Have more control over the type of work you do and how work is done.
  3. May be paid more on a per project basis, depending on your efficiency.

* Please note that contractors may be subjected to "Personal Services Income" rules.

Incorrect classification of employees and contractors by employers may result in:

  1. Back payments of PAYG Withholding that should have been withheld and remitted, Superannuation, Pay and Leave Entitlements, Workers Compensation and Payroll Tax.
  2. Fair Work Prosecution.
  3. Any interest, penalties and fines associated with all of the above.

For more clarification, please use the Employee/Contractor Decision Tool on the ATO website to find out whether your worker is an employee or a contractor.