Employee or contractor?
Many business owners believe that utilising contractors rather than employees reduces their obligations (administrative and financial). Some then request ABNs from those working for them, believing that this classifies the worker as a contractor, in an attempt to avoid an employment relationship.
The problem here is that an ABN alone is not the difference between an employee and a contractor. In fact there is usually no single indicator differentiating contractors and employees. Instead, various factors contribute to a classification either way.
In determining whether or not an individual is a contractor, the following aspects need to be considered:
The legal status/role of the ‘worker’
Individuals operating under or as part of a company, trust or partnership (excluding the ’employer’), will generally be deemed contractors. Trainees and apprentices will always be deemed employees.
Control over work
Employees will usually be directed/guided and supervised in performing tasks (possibly governed by employee codes and procedures), whereas contractors will be assigned a task and are responsible for determining how this will be done. A contractor may also utilise a 3rd party, such as an apprentice, to assist.
Method of payment
Employees are generally paid on a regular cycle i.e. weekly or fortnightly, based on their hours of work or salary. Contractors will submit an invoice for payment at the end of a task or at fixed points during a long-term project, and may have provided a quote prior to commencement of works.
Most employees will utilise tools and equipment provided by the employer, or supply their own tools in exchange for a tool allowance. Contractors usually supply their own tools and equipment, and possibly materials.
Nature of work
Employees will generally expect work to be of an ongoing nature (except in the case of a fixed term employment contract). Contractors can usually only expect to be employed for the duration of a specific task/project. A contractor may be retained for further work after their initial task but this would be under a separate agreement and there is not usually a guarantee of future work. Contractors will generally seek work from a number of sources and may advertise their services.
Hours of work
Employees are usually expected to work assigned hours (i.e. 9am – 5pm), although this is changing with flexible working arrangements. Contractors will often determine their own hours based on the time required to complete a job.
Damages/losses caused by the lawful actions of an employee will most often be covered by the employer’s insurance policy. Contractors are not generally covered by such a policy and will have their own insurance cover.
It is important that business owners correctly and honestly classify their workers. ‘Sham contracting’, or the deliberate classification of an employee as an independent contractor (or persuading an employee to become a contractor), to avoid a legal employment relationship is illegal. Fines of up to $54k can be incurred per instance under the Fair Work Act.
The ATO provides a useful Employee/contractor decision tool, for businesses needing to determine the correct status of their workers. You can access the tool here.
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