Are They Employees Or Subcontractors?

Have you Hired a Contractor or an Employee?

It’s important to understand the difference to get this right as the ATO has been imposing large penalties on businesses that have incorrectly distinguished between the two.

So just because a worker says “they have a valid ABN” or that “they’re only working for a short time” don’t be so quick to label them a contractor as you could find yourself facing hefty fines for failing to meet Superannuation Guarantee, PAYG Withholding & Employee entitlement requirements.

There is no black and white answer that can clearly identify a contractor from an employee as every work arrangement is different.

Instead you must look at each case individually and take into account a combination of factors when determining the appropriate treatment.

There is a Multi-Factor Test that the courts now use for these matters which weighs up the following:

1. Delegating Work
A contractor will have the ability to delegate the work to a subcontractor.
An employee will not be able to pay someone to do the work for them.

2. Basis of Payment
A contractor will be paid to achieve a specific result based on a quote they have provided.
An employee will be paid for their time.

3. Tools & Equipment
A contractor will provide their own tools & equipment to complete the work.
An employee will be provided with tools & equipment or be reimbursed for the cost of them.

4. Commercial Risk
A contractor is legally responsible if anything goes wrong and will bare costs to rectify work.
An employee will have no risk, the business will take legal responsibility and will rectify any defects in their work.

5. Control
A contractor will have the freedom to determine the way the work will be completed.
An employee will have limited control over how the work is performed.

6. Independence
A contractor is running their own business & free to accept or decline work.
An employee is a part of your business, cannot accept or decline work & usually will have specified work hours.

If you are unsure about a work arrangement be sure you go online and use the ATO’s contractor decision tool to check the right treatment: