Employee vs. Contractor: A Side-by-Side Comparison

Are you hiring? A key decision is whether to bring someone on as an employee or engage them as an independent contractor. While both can provide needed skills, their tax and legal implications differ significantly.

The Australian Taxation Office (ATO) focuses on the level of control you exert. Employees operate under the direction and control of the employer, who dictates how, when, and where the work is performed. Independent contractors, conversely, retain autonomy in their work execution, functioning as separate business entities providing services to clients.

The table below provides a breakdown of key factors considered when determining worker classification. These features can help assess whether a working relationship is more indicative of employment or independent contracting.

Feature	Employee	Independent Contractor
Relationship	Works within your business, under your direction	Runs their own business, offers services to multiple clients
Control	High - you direct how the work is done	Lower - controls how and when work is completed
Working Hours	Often regular, as defined by employment contract	Flexible, sets own hours
Payment	Wage or salary	Invoiced
Benefits	Entitled to leave (annual, sick), superannuation, potentially other benefits	Generally not entitled to benefits from your business
Tax Withholding	You deduct PAYG tax and remit to the ATO	They manage their own income tax
Superannuation	You must pay superannuation	Generally responsible for their own super, but some exceptions apply
Payroll Tax	Wages included in your payroll tax calculations	Payments generally not included in payroll tax
Fringe Benefits Tax (FBT)	Applies if you provide fringe benefits	Generally does not apply
Workers' Compensation	You must have workers' compensation insurance	They manage their own insurance
Legal Protection	Protected by employment laws	Governed by contract law

Specific Cases of Worker Classification

While the general principles outlined above provide a framework for worker classification, certain situations warrant specific consideration:

Workers Always Considered Employees:

Certain categories of workers are always classified as employees, regardless of the contractual arrangements. These include:

• Apprentices: Individuals undertaking structured training programs leading to a qualification.

• Trainees: Similar to apprentices, trainees engage in formal training while working.

• Labourers:  Workers performing manual labor tasks.

• Trades Assistants: Individuals assisting tradespeople in their work.

These workers are typically covered by awards and receive specific pay and conditions. Employers must fulfill the same tax and superannuation obligations as for any other employee.

Companies, Trusts, and Partnerships as Contractors:

An employee must be an individual (a natural person). When engaging a company, trust, or partnership, the relationship is inherently a contracting one for tax and superannuation purposes. The individuals performing the work under those entities are not considered your employees.

Labour Hire Arrangements:

When utilising labor hire services, your business contracts with the labor hire firm, not the individual worker. The labor hire firm assumes responsibility for PAYG withholding, superannuation, and fringe benefits tax for the worker.

Hiring Individuals Directly:

When hiring individuals directly, the specific terms of the working agreement or contract determine their classification for tax and superannuation purposes. These agreements can be written, oral, or a combination of both. A comprehensive review of the entire working arrangement is necessary to determine the correct classification.

The Risks of Misclassification:

Incorrectly classifying an employee as an independent contractor can trigger severe repercussions, including:

• Superannuation Shortfall: Liability for unpaid superannuation contributions, plus interest.

• Unpaid Entitlements: Potential back payment of employee entitlements such as leave and overtime.

• Penalties and Interest:  The ATO may impose significant penalties and interest charges for non-compliance.

• Legal Action:  In some cases, legal action may be taken against the business.

Mitigating the Risks:

The ATO employs a "multifactor test" to determine worker classification, considering various aspects of the working relationship. Classifying workers correctly is crucial for compliance and avoiding costly penalties. If you're unsure about the best approach for your business or need guidance on meeting your tax obligations, we can help. Contact us today for expert advice on worker classification and effective tax planning strategies tailored to your specific needs.