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There appears to be a lot of confusion among small business owners about the difference between an employee and an independent contractor.

There is a mistaken belief that if the person supplies an ABN and invoice that they are an independent contractor.

Sadly for those employers who have fallen for this, it is incorrect.

There may be instances where a legal determination is required. Though generally speaking, the following tests can be used to work out if they are an employee or not.

Employee

  • Control:
    Work is performed under the direction and control of their employer, on an ongoing basis.
  • Delegation:
    Is not able to give the work to someone else
  • Working Hours:
    Generally, works standard or set hours.
    (Casual employee’s hours may vary from week to week or day to day).
  • Ongoing Work:
    Has an expectation of ongoing work.
    (Some employees may be engaged for a specific task or specific period).
  • Risk/Responsibility:
    Bears no financial risk for the product/service produced.
  • Superannuation:
    Superannuation contributions are paid into a nominated superannuation fund by their employer.
  • Tools/Equipment:
    Tools/equipment used are generally provided by the employer or entitled to a tool allowance.
  • Tax:
    Has income tax deducted from their pay.
  • Payment:
    Paid regularly (for example, weekly/fortnightly/monthly).
  • Leave:
    Entitled to receive paid leave (annual leave, personal/carers’ leave, long service leave) or receive a loading in lieu of leave entitlements in the case of casual employees.

 

Contractor

When it comes to the principal/contractor relationship, things are a little different.

  • Control:
    Have a higher level of control in how the work is done.
  • Delegation:
    May be able to delegate the work on to someone else within the same contracted organisation
  • Working Hours:
    Under agreement, the contractor decides what hours to work to complete the specific task(s).
  • Ongoing Work:
    Usually engaged to complete a specific task.
  • Risk/Responsibility:
    Bears the risk in making a profit/loss on each task.
    Usually bears the responsibility and liability for poor work or injury sustained while performing the task.
    {Contractors generally have their own insurance policy}.
  • Superannuation:
    Pays their own superannuation.
    (In some circumstances independent contractors may be entitled to be paid superannuation contributions).
  • Tools/Equipment:
    Uses their own tools and equipment.
    (Alternative arrangements may be made within a contract for services, such as leases, etc).
  • Tax:
    Pays their own tax and collects GST on behalf of the Australian Taxation Office.
  • Payment:
    Submits an invoice for work completed or is paid at the end of the contract or project.
  • Leave:
    Does not receive paid leave.

Examples

While the above may sound or appear confusing, the following examples should help you to make things clearer. {These examples are fiction and do not represent any real businesses}

Example 1:
Ruchi has a fast food restaurant in Brisbane City. She engages Rajesh on a contract basis to be the chef for the restaurant and pays him weekly when invoiced with an ABN.

Despite providing his own chef’s knives, the rest of the equipment that Rajesh uses is provided. Rajesh is not able to vary the hours he works, nor is he able to assign the daily duties to someone else.

If Rajesh makes a mistake with the preparation of a meal/dish, the restaurant bears the responsibility for the error, not Rajesh.

In this instance, Ruchi has engaged Rajesh in a sham contracting arrangement when he should be classified as an employee, not a contractor.

Example 2:
Steve has a floristry business and is looking for someone to arrange bouquets, then to deliver them to customers.

He engages Jenny as a causal to assemble the arrangements as per advertised images. He then gets Jenny to deliver the flowers for a set price per delivery. Which Jenny invoices him for on a weekly basis.

In the first instance, Jenny is a casual employee, as long as Steve complies with the minimum hours requirement of the modern award.

Jenny is able to perform the role of a contracted delivery driver, as long as that part is separate to the casual employment relationship.

As with everything in business, the unique circumstances of yours will be different to the examples given.

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