We often receive enquiries from employers and employees asking whether they can or should engage workers as an employee or a contractor.
The question is very important as it can have Employee insurance libility, Superannuation Guarantee and other consequences.
Determining whether a person is an employee or a contractor at law is therefore a very important step. The following list may be helpful in determinations.
Factors suggesting the person is an EMPLOYEE
Below are a number of factors which are common to an ‘Employer – Employee’ relationship, and if they exist, will suggest that the person is an employee.
Note that the existence of any of these factors will merely suggest that the person may be an employee.
- The person is paid by the hour or day (i.e a carpenter paid $30 an hour), or on a piece rate basis (i.e a bricklayer paid per brick laid)
- The person is paid other ’employee-type’ benefits (such as a meal allowance / travelling allowance, annual leave or superannuation)
- The person is instructed when to start and finish work (i.e 9:00am start, 5:00pm finish, with a 45 minute break)
- The person is required to wear a uniform with the employer’s business logo on it
- The person is at times required to do ‘unskilled’ work which is ancillary to their area of expertise
- Before paying the person, the employer deducts taxation for PAYG purposes
- The employer has the person covered under the employer’s own workers compensation policy
Factors suggesting the person is CONTRACTOR
Below are a number of factors which are common to a ‘Principal – Contractor’ relationship, and if they exist, will suggest that the person is a contractor.
Note that the existence of any of these factors will merely suggest that the person may be a contractor.
- The person carries on a registered business (with an ABN), as a sole trader, a partnership, or a company
- The person is registered for GST purposes if their business income exceeds $75,000 per year
- There is a written contractor agreement in place between the person and the employer
- Generally, the person is paid to complete a project (a fixed amount to achieve a fixed result), and is paid a lump sum and / or progress payments upon submitting tax invoices to the employer
- Upon receiving initial instructions from the employer, the person has total control over how the work is carried out, and how the project is completed
- The person may also employ his or her own employees or engage contractors to carry out the work and complete the project, or has the power / authority to do so
- The person has in place their own workers compensation and / or personal accident / sickness insurance policy, public liability / professional indemnity insurance policy (if applicable)
- The person accepts liability for any work they carry out that is defective or unsatisfactory, and has an obligation to rectify such work at his or her own cost
- The person also does work for other businesses / employers, and may also advertise to the public (including through a website)
The ATO provies an onlinetool and associated explanations to assist with such determinations. After answering a series of questions, the tool generates a report which will give:
- a decision of employee or contractor (for Commonwealth taxation and superannuation purposes) for this particular arrangement
- a summary of the information you have provided
- the basis of the decision, and
- a summary of your Commonwealth taxation and superannuation obligations relating to the worker.
Uses remain anonymous at all times and no personal information is transmitted to the Tax Office.
We recommend employers and workers use this tool. Here is the link Employee/contractor decision tool.