Employee or Contractor?12 November 2017
Do you understand the difference between an employee and an independent contractor, and what it means for your practice?
Employing contract staff can be a useful way for architectural practices to manage busy periods and fluctuating workflows. From the perspective of the contractor, such arrangements can also offer flexibility, independence and a wide range of professional experiences.
However, it is vital that you understand the difference between an employee and an independent contractor. The distinction affects your responsibilities as an employer, including superannuation, tax and workers compensation. Sham contractor arrangements – those used by employers to avoid such responsibilities and entitlements – can incur heavy penalties.
The basic distinction between a contractor and an employee is that contractors run their own business and provide services to you, while employees are part of your business. In addition, independent contractors may employ subcontractors to help them complete the work.
Importantly, a worker having an ABN and being employed in busy periods is not enough to classify them as a contractor. To understand the distinction you need to consider the entire working arrangement.
Employee or Contractor – Key Factors
The Fair Work Ombudsman provides the following overview of the key factors that determine if someone is an employee or a contractor.
Degree of control over how work is performed
Employee – Performs work, under the direction and control of their employer, on an ongoing basis.
Contractor – Has a high level of control in how the work is done.
Hours of work
Employee – Generally works standard or set hours (note: a casual employee's hours may vary from week to week).
Contractor – Under agreement, decides what hours to work to complete the specific task.
Expectation of work
Employee – Usually has an ongoing expectation of work (note: some employees may be engaged for a specific task or specific period).
Contractor – Usually engaged for a specific task.
Employee – Bears no financial risk (this is the responsibility of their employer).
Contractor – 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.
Employee – Entitled to have superannuation contributions paid into a nominated superannuation fund by their employer.
Contractor – Pays their own superannuation (note: in some circumstances independent contractors may be entitled to be paid superannuation contributions).
Tools and equipment
Employee – Tools and equipment are generally provided by the employer, or a tool allowance is provided.
Contractor – Uses their own tools and equipment (note: alternative arrangements may be made within a contract for services).
Employee – Has income tax deducted by their employer.
Contractor – Pays their own tax and GST to the Australian Taxation Office.
Method of payment
Employee – Paid regularly (for example, weekly/fortnightly/monthly).
Contractor – Has obtained an ABN and submits an invoice for work completed or is paid at the end of the contract or project.
Employee – 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.
Contractor – Does not receive paid leave.
There is plenty of information out there to ensure that you are employing under the correct categories.
Fair Work Ombudsman
The Fair Work Ombudsman website provides information on the difference between employee and contractors, sham contracting, penalties and general protections. It provides a downloadable fact sheet along with advice for small businesses and independent contractors.
Australian Tax Office
The ATO website provides a range of information, including the Employee/Contractor Decision Tool, while Small Business Assist provides videos on the topic.
Department of Industry, Innovation and Science
ACA Contractor Agreement
The ACA provides members with a model Employment Agreement for Contractors Employed in an Architect’s Office.
The ACA recommends practices seek professional advice before engaging contractors.