Recently the High Court handed down two decisions which have impacted the way we define contractors vs. employees. The first decision determined that a labourer engaged by a labour hire company was an employee, despite a signed agreement describing the worker as a self-employed contractor. The second decision determined that two truck drivers, despite providing private delivery services to one business over a long period of time, were independent contractors. These decisions have confirmed the importance of carefully assigning the terms of the relationship through a written contract or agreement that details the rights and obligations of all involved parties.
Further, the ATO has a decision tool on their website, which may be helpful if you are needing to confirm whether a worker is an employee or contractor. Please note the tool should not be used for labour hire firms, individual workers, or drivers receiving income from of ride-sourcing arrangements.
The Difference Between Employees and Contractors
According to the ATO, the definitions are as follows:
- A contractor is someone running their own business
- An employee works in your business and is part of your business
The ATO has designed a table (see below) that outlines six of the factors that determine whether a worker is an employee or contractor for tax and super purposes. Please see below a simplified version of this table. The factors used to determine the difference are 1. Ability to delegate; 2. Basis of payment; 3. Equipment, tools, and assets; 4. Commercial risks; 5. Control; 6. Independence
|
Employee |
Contractor |
| The worker can’t subcontract/delegate the work – they can’t pay someone else to do the work. | The worker can subcontract/delegate the work – they can pay someone else to do the work. |
| The worker is paid either:
– For the time worked |
The worker is paid for a result achieved based on the quote they provided. A quote can be calculated using hourly rates or price per item to work out the total cost of the work.
|
| Your business provides all or most of required the equipment, tools and assets to complete the work. The worker provides all or most of the equipment, tools and other assets required to complete the work, but your business provides them with an allowance or reimburses them for the cost of the equipment, tools and other assets.
|
The worker provides all or most of the equipment, tools and other assets required to complete the work. The worker does not receive an allowance or reimbursement for the cost of this equipment, tools and other assets.
|
| The worker takes no commercial risks. Your business is legally responsible for the work done by the worker and liable for the cost of rectifying any defect in the work. | The worker takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work. |
| Your business has the right to direct the way in which the worker carries out their work. | The worker has freedom in the way the work is done, subject to the specific terms in any contract or agreement. |
| The worker is not operating independently of your business. They work within and are considered part of your business. | The worker is operating their own business independently of your business. The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work. |
How it affects you – Your tax and super obligations
Your employer obligations will vary depending on whether your worker is an employee or contractor. See a summary below of your obligations depending on the type of worker.
If your worker is an employee, you must:
- Withhold tax (PAYG withholding) from their wages and report and pay the withheld amounts to the ATO
- Pay super, at least quarterly, for all eligible employees
- Report and pay fringe benefits tax (FBT) if you provide your employee with fringe benefits
If your worker is a contractor:
- Contractor’s usually look after their own tax obligations, so you will not have to withhold from payments unless they don’t quote their ABN to you, or you have a voluntary agreement with them to withhold tax from their payments
- You may still have to pay super for individual contractors if the contract is principally for their labour
- You do not have FBT obligations
To find out more on the ATO’s requirements around employees and contractors, please go to https://www.ato.gov.au/business/employee-or-contractor
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