Have you reached that exciting time in your business where you’ve found you’ve grown into a larger biz than you can manage on your own? Are you ready and raring to boost the business and hire someone to help make it happen? Depending on what your needs are, you could be looking at hiring either an employee or a contractor. If you just read that sentence and thought, “Ummm, help?”, don’t worry, we’re here for you. So what’s the difference between an employee and a contractor?
According to ato.com.au, “An employee works in your business and is part of your business. A contractor is running their own business.” Sounds pretty straight forward. But there’s a goodly amount more that can help you distinguish what it is you need in your circumstances. Don’t get unintentionally stuck in a sham contracting situation or paying for equipment and tools you’re not obligated to pay for!
Let’s take a deeper dive into the difference between an employer and a contractor.
What makes an employee?
- An employer/the business that’s hired you controls the direction of the work that you do and depending on the work, how you do it.
- An employee doesn’t delegate their work to others, it’s their job to do the work set out to them.
- When it comes to payment, an employee is generally paid for their time and hours worked and at regular intervals (weekly, fortnightly etc.).
- They’re also entitled to superannuation payments and often have tax deducted from their pay.
- Equipment and tools needed in order to do their work (laptops, software etc.) are provided by the employer. If the employee provides them, then the employer supplies an allowance or reimburses the employee for the purchase.
- If for some reason the employee doesn’t complete the work properly or an issue arises, it is the business/employer’s risk and responsibility for any cost or liability.
- Leave benefits, baby!
What makes a contractor?
- A contractor generally controls the direction of their work and how they achieve the results needed. This can also include their delegating certain work to others to help complete it.
- They provide a quote to the person/company hiring them for the work they will do and they’re paid based on completing their outlined job. They send an invoice with their own ABN to receive payment.
- Contractors are not entitled to superannuation so have to manage their own (although there can be instances where you do have to pay a contractor's Super! We'd recommend checking out the ATO's Super for Contractors factsheet. They also have to make regular tax payments themselves. If you need a bit of an assist when it comes to deciding if you’re after an employee or contractor for tax purposes, we’d recommend checking out the ATO’s Employee/Contractor Decision Tool.
- Any equipment and tools needed to accomplish their work are their own; they don’t generally get reimbursed for tools or items purchased to complete the work, it’s expected they have what’s needed to do the job at hand.
- No leave benefits. Sad face. But you can take a vacation whenever you decide! ;P
One more thing we want to shed some light on is the danger of sham contracting. This is when an employer creates a contract for an employee but makes it look like said employee is a contractor. This happens when employers try to get around minimum wages, super, tax and leave benefits and other obligations that an actual employee contract would have to set out.
Just. Don’t. Do it. It’s illegal. It’s gross and it can get you into a heck of a lot of hot water. If you’re unclear about what you should include in the contracts you need for your situation, we offer an Independent Contractor Agreement template as well as an Employment Agreement template that will set you on the right track, whichever type of awesome human you hire.
Hopefully that’s given you a bit of a clearer picture of the differences between an employee and a contractor. Ultimately, you need to decide how many hours you need someone for, what their job entails, where your budget sits and what you’re able to afford for your needs. Have questions you can’t find the answers to? Hit us up for your consultation.
We get it. There are lots of factors to take into account when you’re gearing up for growth. Knowing the difference between an employee and a contractor is just one part of getting there. The truth is (at least in our humble opinion), it’s a super exciting time and one that you should relish through the decision making process. You’re here! You’ve gotten this far! And that, my friend, deserves a high five. And some bubbly. Cheers!
***Disclaimer. Please read!!***
This article is for general information purposes only and should be used solely as general guidance. It does not and is not intended to represent legal advice or other professional advice.
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