Subcontractor versus Employee – Can you tell the difference?
Posted on October 28, 2013 by GSCPA AdminThe correct classification of your workers as an employee or contractor is your responsibility. There are different tax and superannuation obligations for employees and contractors therefore it is important to consider the differences between the two types of relationships.
An employee works in your business and is part of your business. Alternatively, a contractor is running their own business and provides services to your business.
We have outlined the characteristics of each below:
| Employee | Contractor |
| Control over work
Your business has the right to direct the way in which the worker performs their work. |
Control over work
The worker has freedom in the way the work is done subject to the specific terms in any contract or agreement. |
| Ability to sub-contract/delegate
The worker cannot sub-contract/delegate the work – they cannot pay someone else to do the work. |
Ability to sub-contract/delegate
The worker is free to sub-contract/delegate the work – they can pay someone else to do the work. |
| Basis of payment
The worker is paid:
|
Basis of payment
The worker is paid for a result achieved based on the quote they provided. |
Equipment, tools and other asset
|
Equipment, tools and other assets
The worker provides all or most of the equipment, tools and other assets required to complete the work. The worker does not receive an allowance or reimbursement for the cost of this equipment, tools and other assets. |
| Commercial risks
The worker takes no commercial risks. Your business is legally responsible for the work performed by the worker and liable for the cost of rectifying any defect in the work. |
Commercial risks
The worker takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work. |
| Independence
The worker is not operating independently from your business. They work within and are considered part of your business. |
Independence
The worker is operating their own business independently from your business. The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work. |
It is important to remember that there is no single factor that will be conclusive in determining whether your worker is an employee or contractor. You will need review the whole working arrangement and examine the specific terms and conditions under which the work is performed.
We see many businesses make the wrong decision as they are using incorrect information.
None of the following makes a worker a contractor:
- your business only needs them for short term or irregular work (such as during busy periods)
- you are using their specialist qualifications or skills
- the industry ‘norm’ is to use contractors
- they have an Australian business number (ABN)
- they have a registered business name.
If you are unsure if you have classified your workers correctly or would like more information on the above, please contact the office.