Employee versus independent contractor.

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Employee vs Contractor

The difference between a contractor and an employee is not always clear cut. Under Australian employment law, the relationship between you and your employee is a contract of service, but the relationship between you and an independent contractor is a contract for service. The differences can be subtle, but important.

An employee usually works full-time, part-time or casually and has to work as the employer directs them. A contractor usually works the hours required to do a task and has more control over the way they work. But even these factors are not enough to decide whether someone is an employee or contractor.

A court or tribunal looks at the full picture (totality of the relationship) and all possible factors (the multi-factor test):

  • Degree of control over how and when the work is done
  • Expectation of ongoing work
  • Financial risk
  • Whether superannuation contributions are needed
  • Who provides tools and equipment
  • Income tax deductions
  • Method of payment
  • Leave entitlements
  • Ability to work for other companies
  • Right to delegate or subcontract

If you incorrectly represent to your worker the nature of the relationship between you and that worker, under Australian employment law this could be a sham contracting arrangement.

Contractor vs Subcontractor

While the terms contractor and subcontractor are similar by name, there are key differences regarding how these roles function and the nature of their agreements.

A contractor is a sole entity who seeks business from clients by networking and advertising, negotiating contracts and carrying out projects. As a business owner, contractors negotiate their own rates and conditions of employment including project timeline, hours of work, services provided and method of payment.

Due to the wide scope of some projects, contractors often rely on subcontractors to complete specific tasks they themselves cannot do, but they are still responsible for delivering to clients. For example, a building contractor may hire a roofing subcontractor to restore the roof on a home renovation project.

With this situation, a subcontractor agreement exists between the subcontractor and contractor, not the client. This agreement sets out the terms of the arrangement including rates of pay, services provided, estimated timeline, tax and superannuation.

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Paying Contractors

Independent contractors run their own business. So they have the freedom to negotiate their own prices and the terms of the engagement. Independent contractors are also responsible for paying their own tax and GST.

Paying an independent contractor is relatively simple. Whether you agree to pay them on an hourly basis or after a project is complete, the contractor will send you an invoice to be paid within the agreed payment period.

While independent contractors are not entitled to the same benefits as employees (i.e. leave, holidays and penalty rates) there is one entitlement that can seem like a grey area at times – superannuation.

Do I Have to Pay my Contractors’ Super?

While some contractors make their own super contributions, this is not always the case. The good news is there are ways to find out if a contractor has to be paid super.

Under the Superannuation Guarantee (Administration) Act 1992 (Cth) a contractor is entitled to superannuation contributions if they work under a contract that is “wholly or principally for the labour of the person”.

Below is some criteria the Australian Taxation Office looks at in determining whether a contractor should be paid super contributions:

  • Contractor is an individual: The agreement must be between an individual who provides the service and a customer who receives the service. If the individual works on behalf of another company, that company is responsible for paying the contractor’s super. Not you, the customer.
  • Contractor performs their own work: This means the written contract stipulates that work must not be delegated to a subcontractor. But if the arrangement does not prohibit delegation or subcontracting, this means delegation is possible and the contractor is not required to the work by themselves.
  • Contractor is paid for hours worked, rather than paid to achieve a result: Most independent contractors are paid to perform a specific task, as opposed to employees who are paid for their time. However, if the contractor is being paid an hourly rate this means they are being paid for their time and labour. If the arrangement makes it clear the contractor is being paid to achieve a result, regardless of how much time is spent, then the contractor is typically not entitled to superannuation.

If a contractor meets all of the above criteria they may be entitled to be paid superannuation contributions. Under the Super Guarantee (SG) rules the minimum amount of super to pay each contractor is 9.5% of their ordinary time earnings, as long as they earn $450 or more before tax per calendar month.

Sham Contracting

A sham contracting arrangement is when an employer misrepresents the nature of the relationship between the worker and the business i.e. that the worker is an independent contractor when, in fact, they are an employee.

While some sham contracts are unintentional, (eg an employer misunderstands the employment arrangement), often they are created on purpose so an employer can avoid paying employee entitlements like superannuation, leave, penalty rates and notice of termination.

Engaging in sham contracting is prohibited under the Fair Work Act 2009 and penalties apply if you are caught. Under the sham contracting provisions act you are not allowed to:

  • Claim an employee as an independent contractor
  • Force an existing employee to become an independent contractor
  • Dismiss or threaten to dismiss an employee if they refuse to become an independent contractor.
  • Dismiss or threaten to dismiss an employee in order to engage them as an independent contractor to do the same work.
  • Mislead an employee in order to persuade them to perform the same (or mostly the same) work as an independent contractor

As an employer it is important that you understand the common factors that determine whether a person is an employee or independent contractor. Keep in mind there is no single deciding factor, and each case is approached differently to decide if a contract is one of employment or independent contracting.

Below are some of the most important factors to take into account:

  • How much control the employee has over the work they do
  • the right to delegate work to another
  • The right to perform work for other companies
  • Whether the arrangement is ongoing work or requires a specific task
  • Tax and superannuation
  • Who provides tools and equipment
  • Payment methods
  • Leave entitlements

Employsure advisers can take the confusion out of engaging contractors or employees. For peace of mind, call 1300 207 182 to learn more.

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