An employee works in your business & is part of your business. A contractor is running their own business.
It’s crucial to understand the difference between who should be engaged as an employee for tax & superannuation purposes & who is an independent contractor. The status of someone you employ has an impact on how they are paid and how they pay taxes. Contract workers have greater control over how they do their work and are liable for their own taxes. Whereas an employee works under an employer who pays their taxes & superannuation. Companies may engage both employees & contractors depending on the services they require.
Who is a contractor?
Factors to consider:
-A contractor is free to subcontract or delegate the work by paying someone else to do the work.
–The worker is paid on a quotation provided for an agreed job specification & outcome. This can be an hourly rate or itemised total cost for the work.
-The worker provides the equipment & tools required to complete the work without receiving any reimbursement for the cost of the tools or equipment.
-The worker takes on commercial risk being legally responsible for the quality & completion of the job to specification.
-The worker organises the work subject to any specific terms in the agreement or contract.
-The worker operates their own business independently from your business. The services are performed as specified in contract or agreement & are free to refuse of accept additional work.
Who is an employee?
-An employee cannot subcontract or delegate the work their contract makes them personally responsible for doing the work
-A set amount is paid per regular period for actual time worked, being an hourly rate under an award , annual salary or weekly rate.
-The business provides all, or most of the tools & equipment for job completion & or the worker provides some tools & equipment & is reimbursed by the company through payment of an allowance to cover the cost of tools & equipment
-The worker takes no commercial risk; the business is responsible for work done
-The business will direct & supervise the way the work is undertaken
The worker is not independent from your business but works within the business
Is your contractor an employee?
Many business owners believe that by hiring a worker & calling them a contractor, they will be exempt from PAYG tax, superannuation, payroll tax, and workers compensation liabilities. However, each engagement is different, and if the worker meets the employee definition above they should probably be treated as an employee for tax & emoluments purposes. Engagements should also be reviewed to ensure genuine contractors are not considered as employees.
Recent Case Law – Contractor or Employee?
In a recent High Court decision -Personnel Contracting entered a contract of employment with a labourer in which he was described as a self-employed contractor. The labourer worked under the direction & supervision of the host client for a period, left & then returned some months later. The question being, was the labourer an employee
The court held that the totality of the relationship must be look at & that just referring to a person as an independent contractor in a contract does not necessarily make them one.
Under the terms of the contract the labourer was required to work as directed by the company & their client & was entitled to be paid for work performed. The contract was a contract for service rather than a contract for services & as such the labourer was an employee.
Identifying the distinction between employees and contractors necessitated a thorough examination of the individual’s connection with his or her employer. New case law, may require a review of engagement contracts or reclassification of workers so that all tax & payroll statutory obligations are met.