05 Sep Employee or Contractor
Difference Between Employees and Contractors
An employee works in your business and is part of your business. A contractor is running their own business. The table below outlines the factors that determine whether a worker is an employee or contractor for tax and super purposes. Follow the links in the table for more information about each factor.
| Employee | Contractor |
|---|---|
| Control: Your business has the legal right to control how, where, and when the worker does their work | Control: The worker can choose how, where, and when their work is done, subject to reasonable direction by you |
Mode of Remuneration:
|
Mode of Remuneration: The worker is contracted to achieve a specific result and is paid when they have completed that result, often for a fixed fee |
Provision of Tools and Equipment:
|
Provision of Tools and Equipment: The worker provides all or most of the equipment, tools, and other assets required to complete the work, and you do not give them an allowance or reimbursement for the expenses incurred |
| Risk: The worker bears little or no risk. Your business bears the commercial risk for any costs arising out of injury or defect in their work | Risk: The worker bears the commercial risk for any costs arising out of injury or defect in their work |
| Ability to Subcontract or Delegate: The worker must perform the work themselves and cannot pay someone else to do the work for them | Ability to Subcontract or Delegate: The worker is free to delegate to others who the worker will pay to complete the work on their behalf |
| Integration: The worker serves in your business. They are contractually required to perform work as a representative of your business | Integration: The worker provides services to your business. The worker performs work to further their own business. They may choose to present themselves as part of your business |
| Generation of Goodwill: Your business benefits from any goodwill arising from the work of the worker | Generation of Goodwill: The worker’s business benefits from any goodwill generated from their work, not your business |
Some Workers are always Employees
Any of the following types of workers are always treated as employees:
| apprentices | labourers |
| trainees | trades assistants |
Apprentices and trainees do a combination of work and recognised training to get a qualification, certificate or diploma. They can be full-time, part-time or school-based and usually have a formal training agreement with the business they work for, which is registered through a state or territory training authority or completed under a relevant law.
In most cases they are paid under an award and receive specific pay and conditions. The work arrangement for apprentices and trainees is employment. You must meet the same tax and super obligations as you do for any other employees of your business.
Companies, Trusts and Partnerships are always Contractors
An employee must be a person. If you’ve hired a company, trust or partnership to do the work, then it is a contracting relationship for tax and super purposes. The people who actually do the work may be directors, partners or employees of the contractor but they’re not your employees.
Labour Hire or On-Hire Arrangements
If you have obtained your worker through a labour hire (or on-hire) firm and pay that firm for the work undertaken in your business, then your business has a contract with the labour hire firm and they are responsible for the PAYG withholding, super and FBT obligations. Labour hire firms can be called different names including recruitment services and group training organisations (where your business is referred to as the ‘host employer’).
Hiring Individuals
If you’ve hired an individual, it is the details within the working agreement or contract that determines if they are a contractor or employee for tax and super purposes. The agreement or contract your business has with the worker can be written or verbal.
Employees Treated as Contractors
It’s against the law for a business to incorrectly treat their employees as contractors. Businesses that do this are:
- not meeting their tax and super obligations
- denying workers their employee entitlements
- illegally reducing their labour costs and gaining an unfair advantage over their competitors.
Superannuation for certain contractors
In certain circumstances you must pay superannuation for contractors who are deemed to be employees for superannuation purposes. These circumstances include the following.
- If the worker works under a contract that is wholly or principally for their labour.
- A sportsperson, artist or entertainer paid to perform, present or participate in any music, play, dance, entertainment, sport, display or promotional activity, or similar activity.
- A person paid to provide services in connection with any performance, presentation or participation in these activities.
- A person paid to perform services related to the making of a film, tape, disc, television or radio broadcast.
Your Tax and Super Obligations
Your tax, super and other obligations will vary depending on whether your worker is an employee or contractor.
If your worker is an employee you’ll need to:
- withhold tax (PAYG withholding) from their wages and report and pay the withheld amounts to us
- pay super, at least quarterly, for eligible employees
- report and pay fringe benefits tax (FBT) if you provide your employee with fringe benefits.
If your worker is a contractor:
- they generally look after their own tax obligations, so you don’t have to withhold from payments to them 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 don’t have FBT obligations.