Contractor vs Employee

When a business considers engaging someone to perform work, often the decision is about whether to engage them as an employee or as a contractor. Fair Work Australia, the Australian Taxation Office and other legislation places controls on the engagement of both contractors and employees.

The differences between contractors and employees as determined by Fair Work can be found at https://www.fairwork.gov.au/find-help-for/independentcontractors#difference-between-contractors-and-employees.

To correctly determine whether a worker is an employee or contractor, the whole working arrangement needs to be examined. For example, a worker is not automatically a contractor just because they have an ABN or specialist skills or you only need them during busy periods or if the worker simply wants to be a contractor for personal reasons.

Organisations must take steps to become aware of the differences between an employment relationship and an independent contractor relationship. Failing to do so risks exposure to sham contracting and other breaches. 

The employment relationship is more heavily regulated than a contractor relationship. This often results in breaching laws by incorrectly classifying an individual as a contractor when at law they are in fact an employee.

If you incorrectly classify an individual as an employee or contractor, you may be liable for:

• superannuation charges, where you have failed to make superannuation contributions for the benefit of the individual either because they are an employee at common law or because they are an ‘employee’ under the extended definition in the Superannuation Guarantee (Administration) Act 1992 (Cth).

• additional payroll tax (including penalties and interest) where you have incorrectly claimed contractor exemptions on payments made to employees (for which there are no exemptions available).

• back pay under a modern award or even an enterprise agreement, where you have incorrectly classified an individual as a contractor. Most non-management employees are covered by a modern award and will have entitlements under the award to a minimum wage, overtime, penalty rates, allowances and leave loading. As well as liability for back pay, there are penalties for breaching modern awards.

• unpaid annual, personal and long service leave, where you have incorrectly classified an individual as a contractor. All employees are entitled to paid annual and personal leave and may be entitled to long service leave upon reaching the required number of years’ service.

• compensation for unfair dismissal or for other prohibited conduct. Many employees have access to an unfair dismissal regime, and to other remedies where their employer acts to the detriment of the employee. For example, under the Fair Work Act 2009 (Cth), an employer must not take adverse action against an employee because the employee makes a complaint about safety matters affecting the employee’s employment.