The difference between contractors and employees
For business owners, it is important to understand the difference between hiring an employee and engaging an independent contractor. Misclassifying a worker can lead to unexpected costs, penalties and compliance problems.
What’s the Difference?
Employees
Employees work under the direction of their employer. They:
Receive regular wages or salary
Are entitled to benefits such as paid leave
Have superannuation contributions paid on their behalf
Have tax (PAYG) withheld by their employer
Are covered by workplace entitlements and protections
The employer is responsible for compliance, including super, leave and tax.
Contractors
Independent contractors are running their own business. They usually:
Decide how and when to do the work
Provide their own tools and equipment
Invoice for their services
Manage their own tax and super
May subcontract or delegate tasks
Carry their own insurance
Contractors are not entitled to paid leave and generally work more independently, often with multiple clients.
Why the Difference Matters
It is not just about what the contract says. Regulators and courts look at the working relationship in practice. They consider factors such as:
Who controls the work
The level of independence
Who bears the risk
How payment is structured
If a worker is treated like an employee, calling them a contractor will not change their status. Misclassification can lead to unpaid entitlements, penalties and payroll tax issues.
Where to Get Help
Fair Work Ombudsman: Provides information on rights and responsibilities of employees and contractors. They offer guidance but cannot make a legal determination.
Business.gov.au: Offers resources for contractors and businesses, including guidance on contracts and obligations.
Legal advice: If you need certainty about whether someone is an employee or a contractor, professional legal advice is recommended.
Key Takeaway
Understanding the distinction between employees and contractors helps you avoid compliance issues, manage costs effectively and protect your business.
Disclaimer
This information is intended to be general in nature and is not personal financial advice. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided in relation to your own circumstances.
