Are You an Employee or a Contractor at Work?

Published by Marshall & Gibson Lawyers on the 03 March 2015

Getting the terminology right about your work status as an employee or a contractor is vital in order for you to meet the correct tax and insurance requirements. There is no definitive black and white rule as to whether you will be a worker or contractor for a company, as it involves many different factors.

Here we’ve outlined some of these features to help you in classifying what term suits your position best, as it could mean more rights and benefits for you.

Finances

One of the key aspects that defines the difference between an employee and a contractor is the difference in how they are paid and the risks they take.

Contractors are a business in their own right, and another business will often hire one for a limited time when they want a specific job done. Therefore contractors must meet their own tax obligations including superannuation, PAYG and GST, and keeping up with these taxes is completely their own responsibility. Contractors also bear all the risk of the job, and could potentially not receive any money at all if they have quoted for the job.

Therefore a key factor to determine if you are a contractor is to look at how you are paid. If you personally need to go and send the invoice and then subsequently pay your own tax, it’s likely you are a contractor to the business you are working for.

However this will only apply to a small business, and it is likely as an employee of the contracting firm you don’t deal with invoicing at all. Therefore how can you definitively tell? Another option is to look at who your payslips are being attributed to. If it’s not coming from the business that you have been physically working at, then this is another strong indicator that you are a contractor. In this case it’s best to talk to a work superior you report to so as to figure out exactly what your title is.

On the other hand you may be an employee of one business. A key financial difference between an employee and a sub-contractor is that the business where you physically work will pay your wages for the amount of work you have done, meaning you have no financial risk at all. You as the employee will get all your contributions to your superannuation done for you, and your PAYG tax will be deducted automatically before the remainder of your pay is deposited directly to your bank account. On top of this you are given a set amount of paid leave per year, which you will generally be able to be use once the time has been accrued.

An employee bears no financial risk, and is paid for the hours they’ve worked either weekly, fortnightly or monthly, according to the arrangements between you and your employer.

If you are still not sure whether you are a contractor or an employee from your finances, then the type of work that you perform may also be able to help you find out.

How you perform your work

The other key aspect that gives you an indication of whether you are a contractor or employee is how you go about the work. A contractor will normally be hired for a set job or set amount of work that needs to be done. This may include the repainting of all a business’ offices or work areas, or building an extra office. As a contractor you would provide a business with a quote for the work (if it’s been asked for), and then you use your own tools and whatever labor you think is adequate to get the job done.

On the other hand, an employee will generally do numerous tasks that have been laid out in their employment contract for a set number of hours each day, and the employer will pay them per hour or as an annual salary. The employer will provide all of the necessary safety gear and tools that are required to get the work done. As an employee you have no right to sub-contract the work out and so you must personally carry it out, whereas contractors can decide this for themselves.

Where it can sometimes get confusing is that an independent contractor will occasionally work alongside the employees. In these circumstances you may still be determined as a contractor unless you are going to be at this particular workplace for a significant period of time.

For example, if Murray is hired to remodel William’s complete backyard then William will likely pay Murray a set amount for the work. Murray must complete the amount of work required for this set price, barring unforeseen complications that are the responsibility of the owner William. If Murray gets sick and needs to pay someone else to do the garden work, then this will come out of the agreed price and if you are a contractor it means you may face a loss of money for this job. This is a classic description of a contractor.

But if an employee of William remodels the backyard, then the worker will be paid the same amount of wages regardless of how much work you complete (within reason of course). If you are an employee in this scenario then you cannot pay someone else to do this work. The employee must also provide the worker with the tools to do this work, whereas you wouldn’t with the contractor and they would be expected to bring their own tools.

If the garden is not completed up to standard, then a contractor would need to keep working at it until it was up to the clients standards without altering the quote. However an an employee would get paid for this extra work.

It can be difficult to establish if you are working as a contractor or working as an employee, and the two areas that will make it easiest to determine are your employment finances and how you perform your work. It is best to talk to your superiors about it, as they are most likely to know and can instruct you on what tax and insurance obligations you may need to have in place.