Hiring a contractor often makes perfect sense – for expertise your team lacks, a short-term backlog, or to avoid a formal recruitment process. But be careful: even though you hired them as a contractor, the ATO may see them as an employee, and penalties for ‘sham contracting’ can be up to $51,000 per instance. Here are the major differences.
1. Where and how they work
What’s more relevant than where a person works is how they work. An employee generally has to accept any work assigned and do it themselves. A contractor runs their own business, can work anywhere, and can sub-contract or delegate the work.
2. How they are paid
Employees are paid regularly for the time they work, per item, or by commission. Contractors have a contract stating the work and the price, and are generally paid when the work is completed.
3. Tools of the trade
Employees are given the tools they need. Contractors use their own tools and buy what they need with their own money.
4. The risk factor
Employees aren’t under financial risk – the company is. Contractors can make a profit or a loss on every job depending on how efficiently they work.
5. Entitlements
Employees receive superannuation and paid leave (or casual loading). Contractors are generally responsible for their own super and receive no paid leave – though in certain situations they may be entitled to super contributions.
6. Tax
Employees have tax deducted by their employer; contractors pay their own tax (including GST) directly to the ATO. The distinction isn’t always clear-cut – the ATO’s Employee/Contractor Decision Tool can help. Getting it wrong has serious financial and reputational consequences, so if in doubt, get in touch and we’ll help you check.