Contractor or employee?  A vexed question


When a business considers engaging someone to perform work, often the decision is about whether to engage them as an employee or as a contractor.  The decision is sometimes quite difficult and the difference has implications for items such as, yet not limited to, taxation, superannuation, control and liability.

What are the key differences between an employee and a contractor?

The Fair Work Act, the Australian Taxation Office and other legislation places controls on the engagement of both contractors and employees.   To correctly determine whether a worker is an employee or contractor, the whole working arrangement needs to be examined. For example, a worker is not automatically a contractor just because they have an ABN or specialist skills or you only need them during busy periods.

Some laws apply to both the employment and independent contract relationships

Often there is confusion (or incorrect assumption) with regards to what laws apply to employees and or contractors. It is important to understand that there is legislation that apply to both.

Risks: what if you get it wrong?

Organisations must take steps to become aware of the differences between an employment relationship and an independent contractor relationship.  Failing to do so risks exposure to sham contracting and other breaches. 

The employment relationship is more heavily regulated than a contractor relationship. This often results in breaching laws by incorrectly classifying an individual as a contractor when at law they are in fact an employee.

If you incorrectly classify an individual as an employee or contractor, you may be liable for:

  • superannuation charges, where you have failed to make superannuation contributions for the benefit of the individual either because they are an employee at common law or because they are an ‘employee’ under the extended definition in the Superannuation Guarantee (Administration) Act 1992 (Cth).
  • additional payroll tax (including penalties and interest) where you have incorrectly claimed contractor exemptions on payments made to employees (for which there are no exemptions available).
  • back pay under a modern award or even an enterprise agreement, where you have incorrectly classified an individual as a contractor. As well as liability for back pay, there are penalties for breaching modern awards.
  • unpaid annual and long service leave, where you have incorrectly classified an individual as a contractor. All employees are entitled to paid annual leave, and may be entitled to long service leave upon reaching the required number of years’ service.
  • compensation for unfair dismissal or for other prohibited conduct. Many employees have access to an unfair dismissal regime, and to other remedies where their employer acts to the detriment of the employee.
  • Fair Work Ombudsman Penalties: Fair Work Inspectors can seek the imposition of penalties for contraventions of sham contracting arrangements. The courts may impose a maximum penalty of $51,000 per contravention.

Something that also needs to be considered are your obligations to your customers when you bring on other staff. An employee is part of your business and therefore you are responsible for the work that they do. If you choose to bring on a contractor, you need to ensure they actively support and promote your business as if they are an employee and that you ensure they have their own insurances and are adequately protected.  In summary, there are different responsibilities and obligations for the treatment of staff and contractors. It’s important to understand these differences, and to ensure that your legal obligations are covered in all circumstances.

Please note that the above information is provided as comment and should not be relied on as a substitute for detailed professional advice. Where you would like additional information and support about the content in this document please contact AB Phillips.