Employee or Contractor – do you know the difference?

It’s important for all businesses to have systems in place to determine whether workers
should be classified as employees or independent contractors, as tax, super and other
government obligations are different depending on whether the working arrangement is
employment or contracting.
Employees generally have PAYG withholding, super and fringe benefits tax paid by the
employer. Contractors generally look after their own tax obligations.
If you get it wrong and fail to meet your obligations, you risk having to pay penalties and
What factors do you need to consider?
There are a number of factors which need to be taken into account which help determine
whether a worker could be classed as an employee or an independent contractor.
It is important to realise that no single factor can determine if a person is an independent
contractor or an employee. To correctly determine whether a worker is an employee or
contractor, you need to look at the whole working arrangement.
A worker isn’t automatically a contractor just because they have an ABN or specialist
skills or you only need them during busy periods.
Courts will look at the whole relationship between the parties when determining the
status of a person’s employment.
The Fair Work Ombudsman has produced a table of common indicators that may
contribute to determining whether a person is an employee or independent contractor:
Indicator Employee Independent Contractor
Degree of control over how
work is performed
Performs work, under the
direction and control of their
employer, on an ongoing
Has a high level of control in
how the work is done.
Hours of work Generally works standard or
set hours (note: a casual
employee’s hours may vary
from week to week).
Under agreement, decides
what hours to work to
complete the specific task.
Expectation of work Usually has an ongoing
expectation of work (note:
Usually engaged for a specific
P a g e | 2
some employees may be
engaged for a specific task or
specific period).
Risk Bears no financial risk (this is
the responsibility of their
Bears the risk for making a
profit or loss on each task.
Usually bears responsibility
and liability for poor work or
injury sustained while
performing the task. As such,
contractors generally have
their own insurance policy.
Superannuation Entitled to have
superannuation contributions
paid into a nominated
superannuation fund by their
Pays their own
superannuation (note: in some
circumstances independent
contractors may be entitled to
be paid superannuation
Tools and equipment Tools and equipment are
generally provided by the
employer, or a tool allowance
is provided.
Uses their own tools and
equipment (note: alternative
arrangements may be made
within a contract for services).
Tax Has income tax deducted by
their employer.
Pays their own tax and GST to
the Australian Taxation Office.
Method of payment Paid regularly (for example,
Has obtained an ABN and
submits an invoice for work
completed or is paid at the
end of the contract or project.
Leave Entitled to receive paid leave
(for example, annual leave,
personal/carers’ leave, long
service leave) or receive a
loading in lieu of leave
entitlements in the case of
casual employees.
Does not receive paid leave.
A simple way to help tell the difference
The Australian Taxation Office on its website uses the following simple descriptions:

  • Employees work in your business and are part of your business.
  • Contractors run their own business and provide services to your business.
    Why is the distinction important?
    Employment relationships are regulated by specific labour protection laws and various
    awards and workplace agreements. These laws generally provide a higher degree of
    P a g e | 3
    protection to employees than the general commercial laws that regulate contractor
    This protection includes minimum conditions and standards of employment for
    employees including minimum entitlements for leave, public holidays, notice of
    termination and redundancy pay.
    Adopt good business processes
    Business owners need to keep records to support any decision on whether a worker is
    an employee or contractor and the factors relied on to make that decision.
    Most of the information needed to support the decision can be found in a service
    contract for independent contractors or an employment contract for employees, which
    should accurately reflect the actual conditions of the working arrangement.
    All contracts should:
  • be in writing
  • specify whether it is a contract for services or an employment contract;
  • set out the period of engagement and the remuneration;
  • include dispute resolution provisions;
  • specify if/how the relationship can be terminated.
    It is illegal for an employer to misrepresent an employment relationship or a proposed
    employment arrangement as an independent contracting arrangement or make a
    knowingly false statement to persuade or influence an employee to become an
    independent contractor.
    Under the Fair Work Act inspectors can:
  • seek the imposition of penalties for contraventions of sham contracting
  • apply to the courts to grant an injunction or an interim injunction if an employer
    seeks (or threatens) to dismiss an employee for the purpose of engaging them as
    an independent contractor. The purpose of the injunction would be to prevent the
    dismissal from occurring, or otherwise remedy the effects. Courts can also make
    other orders to have the employee reinstated or compensated.
    If you need more information or if you need assistance or advice on how to proceed
    please call us on 02 9191 9293 or email mail@rnlegal.org