What is the right move – employee or contractor?

When a business employs a worker they need to first ensure if that person is either an employee or a contractor.

The difference of knowing has big implications for taxes and paperwork. The ATO defines an employee as someone who works in your business and is part of your business, whereas a contractor is running their own business.

Some employees will prefer to be classified as a contractor, as depending on their income, they can technically be taxed less. For example, if they operate through a company, their profits will be taxed at 30 per cent.

For the employer, the attraction of putting on a contractor could also be seen as beneficial. They are not required to pay on-costs including sick leave, holiday pay, long service leave, superannuation or ‘workers’ compensation, which would generally become the responsibility of the contractor.

The employer can also take on contractors for short periods, giving them flexibility in the workplace and no ramifications if they put off the contractor at the end of the period.

However, when businesses exploit employees and force them to become contractors, basic rights including unfair dismissal laws can be triggered.

For this reason- but also with the tax avoidance rules to consider – tests were put in place by Fair Work Australia and the Australian Tax Office to determine if a worker is an employee or a contractor.

Therefore there are six basic rules about who is and employee and who is a contractor and they are as follow;

1. A contractor generally does not have to do the work themselves and can subcontract or delegate the work out to someone else.
2. A contractor will be paid for a project or result set out in the contract. An employee, generally, will work set hours.
3. Generally a contractor will provide their own tools and equipment. An employee will use the equipment of the business they work for.
4. An employee will generally take no commercial risk for the work they perform. The risk will be taken by their employer. On the other hand, a contractor will take commercial risk on the work performed and will be legally liable to correct any mistakes.
5. A contractor will have freedom in the way the work is done, subject to the terms of the contract or agreement. An employee will be directed by their employer about how the work will be performed.
6. A contractor will operate their business independently of the business they are contracted to. As a result they are free to accept or refuse additional work. An employee is considered part of the business.

For all these reasons it is essential for a business to know the difference between contractors and employees and hence to avoid implications from the ATO and Fair Work Australia.

If you have any queries regarding these rules, please do feel free to get in touch with the team here at Fortis Accounting Partners.  You can reach us on 02 9267 0108, or via info@exemplary-financial.flywheelsites.com.