Six key differences between a contractor and an employee

Knowing whether you are an employee or a contractor has many tax implications, and getting it wrong can result in the ATO imposing hefty penalties and charges.

So before you decide to start invoicing your boss, or your boss decides to put you on the books as an employee, it’s vital you understand the 6 main differences that the tax office will take into account to determine whether your are actually an employee or a subcontractor.

1. Can you subcontract or delegate your work?

If you’re a subcontractor you can subcontract or delegate work…which means you have the legal right to pay somebody else to do the work for you.

If you’re an employee and you are unable to work, you are not allowed to subcontract someone else to do your work.

A work colleague can cover your shift for you or do your work for you while you are away, however it is your employer who organises and pays for your workmate to cover your job. They can also organise for another person to come in on a temporary basis, e.g. if you are away on maternity leave.

2. What is your basis of payment?

As a subcontractor you’re basically paid by the job. You calculate and supply a quote to deliver either a product, a service or goods. Your quote is based on either an hourly rate or a fixed price for the total cost of the job, and you are generally paid in a lump sum.

However if you’re an employee, you will be paid an ongoing set amount over a period of time. You will either be paid an award rate, an annual salary or an hourly or weekly rate, which is paid regularly (weekly, fortnightly, or monthly).

3. Who owns the equipment and tools you need to do your job?

As a subcontractor you have to purchase, maintain and repair any equipment and tools you need to complete your work. You do not receive any financial reimbursement for these assets.

If you are an employee your business will provide you with all or most of the equipment, tools and other assets required to complete your work. If you need to purchase or provide any of this equipment in order to complete your work, your employer will either provide you with an allowance or reimburse you for your costs.

4. Do you take any commercial risks?

When working out whether you are actually an employee or a contractor, ask yourself whether you have any legal risk or whether you are liable for rectifying, at your own expense, any defect in your work?

You are legally responsible for your work, as well as any defects in your work if you are a subcontractor. If you are an employee you don’t have to take any commercial risks because your employer is legally responsible not only for your work, but also for the cost of fixing any mistakes you make.

5. How much control do you have over your work?

Subcontractors have control over how, where and when a job is done, as long as it is within the terms and timeframes of any contract or agreement. You just need to complete the job on time, as specified, and within budget.

But if your employer controls the way your work is done, you are an employee. Your employer has the right to decide what work you do, where you do it, how you do it and when you do it.

6. Do you operate independently?

If you are free to refuse or accept work from different customers you are a subcontractor. You operate as a business on your own, totally independent to any of your client’s businesses. You may provide services within their business and be paid directly by their clients for these services, or you may be paid by the business to provide services for their clients.

As an employee you are restricted to work solely within your employer’s business and you are considered a part of their business.

Having an ABN, being employed for a short term, signing an agreement or invoicing for your work…none of these things on their own make you a contractor or protect you as an employer from calling your employees subcontractors.

At North Advisory, we’re experts in tax law and we work with businesses of all sizes, from tradies up to medium to large businesses to ensure they remain compliant at all times.

If you’re in any way at all unsure as to whether your workers are employees or subcontractors, don’t let a hefty fine from the ATO be the way you find out!

Find out more.