In the eyes of the Australian Taxation Office (ATO), there is a vital difference between employees and contractors. This difference impacts your superannuation, worker’s compensation, and taxation obligations. Failure to correctly categorise employees and contractors could cause them to miss out on their entitlements. The ATO also imposes penalties and charges on employers who misclassify workers, so it’s well worth the effort to ensure you’re getting this step right.
What Is The Difference Between Employees And Contractors?
An employee works in your business and is part of your business. A contractor is running their own business and offering services to yours.
To understand the difference, you must look at the whole working arrangement. The most important questions to ask are:
- Are you paying someone to perform a job?
- Do you pay that worker an agreed amount based on a quote they provided?
- Do you expect them to provide their own tools and equipment to do the job?
- Is the worker legally responsible for their work and liable for fixing mistakes or defects?
- Does the worker decide how they will do the job?
- Is the work subject to specific terms or agreements in a contract?
- Does your worker operate their own business independent of your needs?
Are Apprentices and Trainees Employees Or Contractors?
Apprentices, trainees, labourers, and trades assistants are always employees, never contractors.
An apprentice or trainee is in the process of gaining a qualification, certificate, or diploma. They are full-time, part-time, or school-based and have a formal training agreement with the business they work for. They must register through a state or territory training authority or under relevant legislation and must receive the relevant award payment rate. You must meet the same tax and super obligations as you do for any other employees of your business.
Pro tax tip: If you previously hired a worker without correctly categorising them, you can review your decision now to make sure you got it right. For help with this, we recommend contacting your nearest ITP office so one of our highly skilled tax accountants can ensure you’ve classified everything correctly and met your obligations.
Six Factors: Determining Whether A Worker Is An Employee Or Contractor
There are six factors that, taken together, help to determine if a worker is an employee or a contractor. The following table gives you an easy way to review the factors and tell the difference between employees and contractors.
| Employee | Contractor |
| Ability to subcontract/delegate: The worker can’t subcontract, delegate, or otherwise arrange for someone else to do the work. | Basis of payment: The worker is paid either for the time worked, a fixed price or a commission. |
| Basis of payment: The worker is paid either for the time worked, a fixed price, or a commission. | Basis of payment: The worker is paid for their result based on a quote they provided. |
| Equipment, tools and other assets: Your business provides the tools required to complete the work. Or, if the worker provides all or most of the tools to complete the work, but your business provides them with an allowance or reimburses them for the cost of the equipment, tools and other assets. | Equipment, tools and other assets: The worker provides all of the tools required to complete the work. The worker does not receive an allowance or reimbursement for the cost of this equipment, tools and other assets. |
| Commercial risks: The worker takes no commercial risks. Your business is legally responsible for the work and is liable for the cost of any mistakes. | Commercial risks: The worker takes commercial risks, is legally responsible for their work, and is liable for the cost of any mistakes. |
| Control over the work: Your business tells the worker how to complete the work. | Control over the work: Your business does not tell the worker how to complete the work. |
| Independence: The worker is part of your business. | Independence: The worker operates their own business independently of yours. |
Companies, Trusts, And Partnerships
Companies, trusts, and partnerships are considered contracting relationships for tax and super purposes.Â
Labour Hire Or On-hire Arrangements
Do you hire workers through a labour hire or on-hire firm? If you pay that firm for the work undertaken, it’s a contractual relationship. The labour firm is responsible for the PAYG withholding, super, and fringe benefits tax (FBT) obligations.
Pro tax tip: Want to learn more about your FBT obligations as an employer in Australia? Take a look at our guide to reporting, lodging, and paying Fringe Benefits Tax.
Hiring Workers In Australia
If your business hires an individual, the details of the agreement determine if they are a contractor or employee. Note that this can be written or verbal. In other words, the absence of a written record won’t absolve you of your obligations if the person you hire meets the criteria of being an employee.
Do you need help determining your tax and super obligations for the workers you’ve hired? ITP’s Income Tax Professionals have been helping Australian business owners with these questions for more than 50+ years. We can help you ensure you’re perfectly compliant, ensuring you never face any issues with the ATO. Our skilled accountants can do so much more for your business, taking the stress of bookkeeping off your shoulders and helping you minimise your tax bills. Speak with one of our friendly accountants today.