Hiring a contractor vs an employee: all you need to know.


Business is booming and you need an extra set of hands to keep on top of the workload, that’s great news.  You are now ready to hire some extra help. With seemingly more obligations to engage an employee than to hire a contractor, it would be easier just to get a contractor on board to do the work, or would it?


What is the difference between an employee and a contractor?

Employers are often muddled with the distinction between employees and contractors. It is essential to know that you cannot treat an individual working for you as a contractor to get around your responsibilities associated with hiring an employee. A person having an ABN does not necessarily make them a contractor.

We have put together a guide for you to determine which category your hired help falls into. It is important to remember that this is not an exclusive test, which means meeting one or all of the condition does not necessarily mean you are definitely an employee or a contractor. It involves identifying and weighing up various features to see what the balance lies.

Control over work performedEmployers has the right to control how, when and where the employees performs their dutiesContractors have the flexibility on how the work is completed
ExclusivityEmployees usually works exclusively for employersContractors are free to provide services to general public
Fixing mistakesEmployers are responsible for employee’s mistakesContractors are responsible for their own mistakes and would often rectify at own cost.
Tools & equipmentEmployees usually perform work using tools and equipment provided by their employerContractor generally provides their own tools and equipment
Location to perform workEmployees work at the place of business of the employerContractors can determine their own place of business
RemunerationEmployees get paid for their timeContractors are generally paid for results achieved based on quote provided
Ability to delegateEmployees can’t pay someone else to do their workContractors have the ability to pay someone else to do their work
EntitlementsEmployees are generally entitled to leave and super entitlementsContractors are not entitled to leave or super

Why is the distinction important?

There are severe penalties for employers who wrongly treat their employees as contractors.  These can include;

  • PAYG withholding – The ATO may seek payment for the amount that should have been withheld. You may also be charged interest on the unpaid amounts.
  • Superannuation – You would have to pay Superannuation contribution to the deemed employee plus any interest and administration fees. Additionally you may also be liable for an additional superannuation guarantee of up to 200%.
  • Entitlements – You may be liable to pay leave and loading entitlements to the employee that would have been accrued over the period of employment.
  • Workers Compensation – You may be liable for penalties related to the relevant state scheme.
  • Payroll Tax – If you are over the payroll threshold, you would be liable for payroll tax that would have been payable. There may also be penalties and charges imposed.

The ATO provides an Employee/Contractor decision tool to assist businesses to decide if your hired help is an employee or contractor. The team at Link Advisors are also here to help ensure that you make the right decision when you are ready to engage an extra set of hands. So reach out to us and have a chat!