Employees vs Contractors - Part 1
- Arnold Shields
- Jan 11, 2011
- 3 min read
Updated: 5 days ago
For years, Australian businesses have relied on the control test to determine whether a worker is an employee or a contractor. Under this traditional view, if a business had the right to direct how and when a worker did their job, that person was typically classified as an employee.
However, recent court decisions have disrupted this black-and-white approach. The courts have moved away from relying solely on control and are instead focusing on the totality of the relationship. As a result, there's now no definitive checklist to determine whether a worker is an independent contractor or a common law employee. Each case must be assessed on its own facts.
That said, there are key indicators that still provide useful guidance.
Key Factors for Determining Employee or Contractor Status
1. Integration
Employee: Works in the business as part of its operations.
Contractor: Operates their own business, often with multiple clients.
2. Delegation
Employee: Must perform the work personally and cannot delegate.
Contractor: Can delegate or subcontract tasks to others.
3. Level of Control
Employee: Directed by the business on how, when and what to do.
Contractor: Maintains autonomy over how the work is done.
4. Risk
Employee: The employer assumes commercial risk, including liability for poor work.
Contractor: Bears their own risk and liability for outcomes.
5. Assets and Expenses
Employee: Uses employer’s equipment and resources.
Contractor: Provides their own tools, pays their own costs.
6. Results
Employee: Paid hourly, daily or weekly (e.g. award wages).
Contractor: Paid to deliver a specific result or project.
The Financial Risk of Misclassification
Misclassifying an employee as a contractor can be a costly mistake for businesses. If the ATO determines that a worker is in fact an employee:
The business will need to back-pay 11% Superannuation Guarantee Contributions (SGC), on top of any previous contractor payments.
All future payments to the worker will be subject to PAYG withholding obligations.
The business will need to issue PAYG payment summaries and ensure compliance with employment tax laws.
For many small and medium businesses, these penalties and obligations can be financially devastating, especially if the misclassification spans years.
What’s Coming Next in This Series
In the coming weeks, we’ll explore the most commonly asked contractor classification questions, including:
Does having an ABN automatically make someone a contractor?
If a worker is hired through a company or trust, can they still be considered an employee?
If a person is a genuine contractor, do you still need to pay SGC?
What specific criteria do courts and the ATO use when assessing the employment relationship?
Need Help With Worker Classification?
At Dolman Bateman, we specialise in helping businesses understand their employer obligations and avoid ATO penalties. If you’re unsure whether your workers are contractors or employees, book a consultation with our tax advisory team today.a worker is a contractor or an employee for payroll tax and worker compensation purposes
Disclaimer:
The information provided in this article is general in nature and does not constitute personal financial, legal or tax advice. While every effort has been made to ensure the accuracy of this content at the time of publication, tax laws and regulations may change, and individual circumstances vary. Dolman Bateman accepts no responsibility or liability for any loss or damage incurred as a result of acting on or relying upon any of the information contained herein. You should seek professional advice tailored to your specific situation before making any financial or tax decision.
