There are dangers in engaging an individual as a ‘contractor’ without having a proper understanding of the law. You may find that the individual is considered to be an employee at law, and this brings with it a range of legal obligations – and liabilities if you get it wrong.
An employee generally works in a business and is part of a business, while a contractor runs their own business.
Contract of Service vs Contract for Service
Employee – Contract of Service
An employee relationship is a Contract of Service wherein an employee provides services based solely at the employer’s discretion. Below are a few factors under an employer-employee relationship.
- Is controlled by the business, they are required to do job they are instructed to do according to their job description. The business has the right to direct the way in which the
worker does their work.
- Cannot pay someone else to do the work. He must present themselves for work and cannot send someone else as a substitute.
- Is paid based on the time worked, a price per item or activity, or a commission.
- Takes no commercial risks. The business is legally responsible for the work done by the worker and liable for the cost of rectifying any defect in the work.
- Is not operating independently of the business. They work within and are considered part of the business.
- The employer is obliged to provide work for the worker and the worker is obliged to complete the work.
- The business provides all or most of the equipment, tools and other assets required to complete the work, or the worker provides all or most of the equipment, tools and other assets required to complete the work, but the business provides them with an allowance or reimburses them for the cost of the equipment, tools and other assets.
Contractor – Contract for Service
A contractor relationship is a Contract for Service wherein contractors work to provide a service for the benefit of another business. Simply stated, there is a contract between two businesses. Below are a few factors under a contractor-business relationship.
- Is required to do a job according to the contracts specifications and the standards required by the client as agreed in a contract.
- Can pay someone else to do the work. They can provide a substitute to complete the work specified in the contract.
- Is paid for a result achieved based on the quote they provided. A quote can be calculated using hourly rates or price per item to work out the total cost of the work.
- Provides all or most of the equipment, tools and other asserts required to complete the work. The worker does not receive an allowance or reimbursement for the cost of this
equipment, tools and other assets.
- Takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work.
- Has freedom in the way the work is done, subject to the specific terms in any contract or agreement.
- Is operating their own business independently. The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work.
What if you get it wrong?
Generally, the employment relationship is more heavily regulated than a contractor relationship. If you incorrectly classify an individual as a contractor, where at law they are in fact an employee, you will find that you are at risk of breaching the law. You may be liable for:
• superannuation charges
• additional payroll tax (including penalties and interest)
• back pay under a modern award
• unpaid annual and long service leave
• compensation for unfair dismissal or for other prohibited conduct.
Are you still unsure if you have determined your employees and contractors correctly? Contact us and we will help you distinguish on which of the two classifications you fall under. Please feel free to download the Fair Work Fact Sheet.