Employee or Contractor: An Easy Guide To The Differences

photo-1434030216411-0b793f4b4173For a lot of businesses taking on someone to share the workload or provide additional expertise ends up harder than it first seems. Before even starting the search it’s important to be clear on whether you are engaging a contractor or hiring an employee.

According to the Fair Work website: “Fair Work Inspectors can seek the imposition of penalties for contraventions of sham contracting arrangements and reform opt-in provisions. The courts may impose a maximum penalty of $54,000 per contravention.” A business can also be required to backpay the superannuation payments as well as this hefty fine.

So, how do you avoid getting slammed with a big fine and make sure you are fulfilling your legal obligations?

The line between a contractor and employee is actually very simple and relies on a few key areas.

Autonomy over how they complete the workphoto-1448932223592-d1fc686e76ea

An employee completes the work based on instructions from the employer, the business controls not only the final outcome they require but the process as well. For example a payroll officer will need to ensure not only are employees paid and ato rules satisfied but they will need to follow processes such as how payslips are delivered, what program is used to record hours and pay rates, how employees timesheets are filed and approved as dictated by the employer.

A contractor,  has a much higher degree of control and generally can follow whatever processes they like as long as the end product is achieved. For example if you hired a graphic designer to create a logo for your business. The image at the end needs to be approved by the business however the designer can use whatever programs they like, work on it when and how they like within the limitations of the agreement made between the two. In short, the employer doesn’t care how it’s done, as long as it gets done!

Option to outsource tasks

A major difference between employees and contractors is the ability to outsource tasks. Can you imagine if one of your employees decided they didn’t feel like working today so they sent a friend in their place? As an employee the person is responsible for completely the work personally.

A contractor is able to outsource work to someone else, so an accountant that you hire may pay a bookkeeper to complete some of the tasks required for the whole project.

Hours and duration of work

An employee will generally expect to work on an ongoing basis for most roles and for a similar number of hours each week. The role of an employee offers more security and a longer term role and for the employer the ability to vary the tasks required of that person.

A contractor is typically hired for a specific amount of time or a task. For example, the contractor might be hired on October 1st to have a project done by October 31st. Once the 31st comes and goes, it is (usually) expected that the contractor and employer will part ways. Alternatively you may hire someone to provide website support as an ongoing task and they would also be considered a contractor.

Tools of the Trade

An employer is required to provide the tools required for an employee to complete their role. That may include materials, equipment, computer programs as well as office furniture.

A contractor on the other hand provides everything they need for their work. Think about a plumber, you expect them to arrive with all the tools and materials to complete the job, if they turned up empty handed you would be very shocked.

Financial differences

Employees rely on the business for their holiday, sick, superannuation and long service leave payments and generally fall under a workplace agreement or award. They are paid an hourly rate or yearly salary and all payments are set by the agreement or award.

Financial Empowerment Coach for Women in Perth WAA contractor requires not only their own ABN but also needs to be responsible for their own ATO obligations eg GST registrations. The contractor is paid a set rate either hourly or an agreed amount for the project and is responsible for their own additional payments. A contractor has the ability to set their own hourly or project rates.

If you keep these factors in mind it is easy to meet the requirements of Fair Work Australia and decide on the best solution for your business as well as the person you engage to help you. Whether you are a business or individual Grace can help you with advice on the best plan to suit you. Contact me for a chat about your needs.

Grace Mugabe Financially Empowered

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