Contractor vs Employee – Do you know the difference?

You may believe it is simple or straightforward, hiring contractors versus hiring employees. You may think you know the difference, but do you really?

To be considered a contractor, certain criteria need to be met:

  • They need to have a certain level of control over the work they are performing on a day-to-day basis.
  • They are engaged to produce a specific result.
  • They have the right to delegate work.
  • They bear the commercial risk and responsibility for their work or injury.
  • They provide their own tools, equipment and, in some cases, materials.
  • They work for you on an as-needs basis, rather than being an integral part of your business.

They may have an ABN, but that in itself is not enough.

They may work for you only 80 per cent of their time, but that is also not enough.

They may only work for you for a short period of time, such as two months, but that is still not enough to consider them to be considered a contractor.

Why should you care? The answer is because it could cost your business a great deal of money that you did not plan for.

Superannuation implications

When you employ people on your payroll, it is relatively straightforward to understand your requirement to pay superannuation. What sometimes gets lost or forgotten is the requirement to pay the same 9.5 per cent of gross payments to your subcontractors. Not all your subcontractors would attract this requirement, but those who just supply labour as individuals/sole traders and those who work predominately for you would.

Why? The answer is that the ATO sees those contractors as employees, particularly if they are not employed to produce a specific result on a specific job or project and they are employed as part of a larger work group to work together to complete that project. In other words, they are no different to the employees on your payroll.

There is no obligation to pay those subcontractors who are employed to perform a specific job, such as roofing contractors, electrical contractors and plumbers. If the transaction is considered to be a business-to-business relationship with another company that supplies labour and materials, then the obligation for superannuation does not exist.

Understanding the difference between the two will ensure you comply accordingly. More importantly, with this knowledge, you may seek to employ subcontractors on a different basis moving forward so as to not impose additional obligations on your business.

Workers’ compensation implications

Workers’ compensation applies in a similar manner to superannuation. If the labour, be it under an employee relationship or as a permanent or semi-permanent subcontractor, is considered to be an employee relationship in the eyes of the industrial relations and tax law regime, then workers’ compensation is required to be paid.

Just like with superannuation, determining how you engage the services of subcontractors will have an impact on your workers’ compensation payments.

While there is a financial impact of deciding whether your labour force will be employees or external contractors, the issue of control may be just as important, if not more so. As explained earlier, you have total control and direction over employees in terms of what they do, how they do it and when they do it. When it comes to external contractors, they control how and when they perform the work, and even who performs the work, within the specific requirements of the job. They can delegate to their employees or subcontractors, and their methods could well differ to your own. While you may lose some control, you do benefit from not having to direct and manage the work, given you have confidence in the contractor you have employed to perform the work.

In summary, there are many statutory compliance obligations placed upon you in your building and property development business. Being aware of these is the first step. Being set up to account for these is the second. Knowledge is power but management is success.

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Tony Dimitriadis
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