Contractors vs Employees: What’s better for business?
You’re looking to expand your business, need additional support, or require a specialist for an upcoming project. Do you hire a contractor or employee?
While it may seem simple, understanding the differences and how it could impact your business (and financial obligations) is key. Especially when it comes to tax, super and other employer responsibilities.
To help you assess what’s right for you, Partner Shaun Borg discusses the ins and outs of contractors vs employees and what business obligations you need to consider.
What is a contractor?
Simply put, a contractor is a separate business that provides a service. Whether a building contractor, an industry specialist, or a managed service provider, the business provides a service to you as part of a contractor agreement.
An easy way to differentiate between a contractor vs an employee is if the service is provided by a company, trust or partnership. According to the Australian Taxation Office (ATO), these groups are always classified as contractors. Apprentices, trainees, labourers and trade assistants, however, are always employees.
“When hiring a contractor it’s essential to do your due diligence – especially when it comes to insurance,” said Shaun.
“For example in the building and construction industry, you may hire a roof contractor. Do they have the insurance required for a building site?”
“Sole traders without employees cannot get workcover and some building developers require all workers entering a building site to have it. You then run the risk of non-compliance and being liable if something goes wrong if you’ve allowed a contractor on site without it. They can also refuse site entry to the worker, costing you time and money to find a replacement.”
What makes a worker an employee?
While it seems straightforward – and anyone hired as an individual could be an employee – you need to consider the worker’s entire arrangement.
To be an employee, your business:
- Controls how, where and when they work
- Provides the tools, equipment, processes and training required
- Defines rates, salary and working arrangements
- Pays wages (or salary) directly to the worker
“This definition is essential to understand, and this is where a lot of businesses can go wrong,” said Shaun.
“For example, a worker could sign a contractor agreement but their working arrangement could be defined as an employee. As a general rule of thumb, if you’re paying for labour, they are most likely an employee.”
If a worker is hired through a labour hire agency, are they an employee or contractor?
At times you may need to hire a specialist or worker through a labour hire company, such as a recruitment agency, specialist hire group, or group training organisation.
Although you are considered the ‘host employer’, the worker is not your employee. The labour hire company is considered the employer, paying the worker’s wages and responsible for any employment benefits, taxes and super contributions.
Contractor vs employee: how to know the difference?
While on paper the difference between a contractor or employee seems simple, in the real world it may be hard to know if your worker is (or should be) a contractor or employee.
To avoid misclassification – and potential back taxes, fines, penalties or legal disputes – here are a few key questions to help you assess if your worker is a contractor or employee.
|Can you control how, where, and when they work?||No||Yes|
|Do you need to provide the required tools and equipment the worker needs to complete the job?||No||Yes|
|Does the worker define their own fees and service charges?||Yes||No|
|Does the worker define the scope of work, timelines, hours of service and method of payment?||Yes||No|
|Can the worker contract their work out to another worker?||Yes||No|
|Is the worker paid a salary or wage?||No||Yes|
Not sure if your worker is a contractor or employee? The ATO has an easy employee vs contractor decision tool on their website to get you started. Our team can also assess your situation and provide business advice on how these classifications impact your taxation, superannuation and financial reporting responsibilities.
What tax and super obligations are required for contractors vs employees?
Your tax and super obligations change according to how your worker is classified.
If your worker is an employee, your business is responsible for not only paying the worker’s salary or wages but also their superannuation payments, pay as you go (PAYG) withholding tax, and any associated fringe benefits or pay roll tax.
Even if you have a written agreement, your taxation and super responsibilities remain the same. You are also responsible for this information being provided to the Australian Taxation Office (ATO) as part of Single Touch Payroll (STP) reporting requirements.
In comparison, a contractor is responsible for their own tax, super, and reporting as they are a separate entity. They are also responsible for their own insurances, annual and sick leave, and any other employment benefits.
It’s also important to assess worker classifications regularly, highlighting any potential risks that may result in working arrangement changes. For example, if you hired a contractor years ago and you now provide all the equipment they need for the job, define their employment hours, and pay them directly regularly (at a set time), they may be considered an employee by the ATO.
“If the nature of their employment has changed, you could be responsible for super and employee-associated taxes,” said Partner Shaun Borg.
“For example, if deemed an employee for the least 5 years you could be liable to back pay super contributions for that entire period. To avoid audit surprises, we recommend assessing employment arrangements as part of your yearly business review process. This can also help you uncover potential cost savings.”
How to assess if a contractor or employee is right for your business
While a contractor can save you money – and decrease reporting – it does come with limitations and risks, and you should assess potential impacts and obligations before making a decision.
If you need services or a specialist for a period of time or for a particular project, a contractor could work for you. However, you will not have control over how, when or where the service is performed (or if it’s subcontracted).
An employee gives you more control, however it does come with additional tax, super, training and equipment costs. An employee will also be more invested in your business and its performance over the long term.
By understanding your requirements, we can provide business advice and highlight risks associated with each employment type and suggest the right structure for you.
“When it comes to contractors vs employees there can be a lot of grey areas. As business advisors, we can provide expert business advice tailored to your situation,” said Shaun.
“By taking into consideration your full business position, we can help you assess potential risks as well as taxation and reporting requirements. Our business advisory services can also uncover other areas of improvement, such as what approach can decrease costs. Helping you make an informed decision.”
Not sure if a contractor or employee is right for you? Get in contact with Mead Partners to discuss your business requirements.
About Shaun Borg
Joining the MEAD Partners family over 14 years ago, Shaun is a business partner and chartered accountant. He’s passionate about helping businesses maximise their potential, providing expert accounting and business advice to reach their business goals. In 2019, Shaun was also named the youngest MYOB accountant of the year. When not crunching the numbers, you’ll find Shaun out in the great outdoors. Learn more about Shaun and the MEAD Partners team