What is the difference between a contractor and an employee?

Do you employ a team? Do you have employees and/or contractors? Do you know the difference? A number of businesses, to their detriment, do not understand the difference between an employee and a contractor. This puts the business at risk because of the consequences that can occur to a business if they have brought a person into their team and classified them incorrectly.

Why does it matter?

The rules and regulations an employer must comply with in the case of employees are more onerous than those for contractors. An employee is entitled to certain conditions of employment that a contractor is not. Further, the employer has to collect an employee’s superannuation entitlement and tax, while it does not need to do this in the case of a contractor.

If you engage someone as a contractor but they are really an employee, you could be penalised. If you pay them less than what they are entitled to as an employee, you have to pay the difference and you can be held liable for other costs. For these reasons, it is crucial that you classify your team correctly, as otherwise you could seriously damage your business.

Some of the chief differences

There is no simple way to distinguish between an employee and a contractor. As a general rule, you need to look at the amount of time the person works for your business. If they do more than 80% of their work for you, then they are probably an employee.

However, that is not the complete answer, and there are a number of other factors that need to be considered:

• Terms of payment: an employee is paid a regular weekly amount, while a contractor is paid on a per job basis;
• Ability to subcontract or delegate: an employee generally can’t do this, while a contractor can;
• Tools for work: an employee is generally supplied with the tools they need to do their work, while a contractor will usually have their own; and
• Who is responsible for a negligence or poor workmanship claim: an employer is responsible for an employee’s work, while a contractor is generally personally liable.

Properly classifying your team can be a difficult process and it is important that you seek the right advice. There are tools available on the Australian Taxation Office website that can help but they are not definitive. You should seek the advice of a lawyer or employment consultant to help you understand the difference.