In today’s fast-changing workplace, the gig economy is booming. More and more companies hire external consultants, contractors and freelancers on a per project basis rather than hire full-time staff. However there is a risk, and a grey cloud, when it comes to employment and who is considered staff and who is considered a contractor.
An individual might be considered to be an employee by law, which brings with it a range of legal obligations – and liabilities if you get it wrong. You could incur penalties – and not just from the ATO. The courts may impose a maximum penalty of $12,600 for individuals and $63,000 for corporations, per contravention.
An employee works in your business and receives superannuation, accumulates leave and other entitlements. An employee usually works full-time, part-time or on a casual basis and does the work as directed by an employer.
A contractor runs their own business and pays their own superannuation, PAYG and does not receive employee-like entitlements. A contractor usually works the hours as required to do a task and has more control over the way in which they manage the task. They can be engaged directly as a natural person, through a trust, partnership or company.
Even owning an Australian Business Number ABN and submitting an invoice does not automatically make an employee a contractor. Many factors of the working arrangement are relevant.
There is a multi-factor test when deciding upon employee of contractor status:
|Measure of control exercised by the principal/employer||The employer controls how, when and where an employee performs their duties. Tasks are undertaken at the request of the employer.||Contractor use their own initiative how, when and where they perform their duties.|
|Exclusivity||Employee works exclusively for the employer.||Contractor is free to service multiple clients.|
|Right to delegate||An employee is responsible to undertake the tasks and cannot outsource them.||A contractor may delegate tasks.|
|Risk, rectification of faults||Employee bears little or no responsibility to rectify poor work. The employer is responsible for the work of the employee.||The contractor is responsible for the quality of the work and for fixing up mistakes.|
|Tools and equipment||The employer supplies tools required by the employee to perform the tasks at the employer’s expense.||The contractor supplies their own tools and is responsible for owning the equipment to complete the task.|
|Hours of work||The employer sets the hours of work to be undertaken by the employee.||Contractor set their own hours to complete the task.|
|Leave entitlements||The employee is entitled to obligations such as PAYG, sick and holiday leave.||A contractor is not entitled to obligations such as PAYG, sick and holiday leave.|
|Payment||The employee is paid for their time at a salary or agreed hourly rate.||The contractor is paid per service or units of work.|
|Method of engagement||Employees are always personally engaged.||A contractor can be employed by a trust, partnership or company.|
|Part of the business||An employee works in the business of the employer.||A contractor works for their own business and is independent than that of the employer.|
If your worker is an employee you’ll need to:
- withhold tax (PAYG withholding) from your employees wages, report and pay the withheld amounts to the ATO on behalf of the employee
- pay super, at least quarterly, for eligible employees
- report and pay fringe benefits tax (FBT) if your employee has received fringe benefits
- pay the GST if required
- pay Person Services Income
- pay a Medicare levy.
Do you know the difference?
Your tax agent will help you determine if you’re hiring an employee or a contractor and will work out what obligations you’ll need to pay. The difference between employee and contractor status might be subtle, but knowing will also save you potential trouble with the ATO.