Hiring assistance is a big milestone for any business with many asking should they hire an employee or independent contractor. Both forms of engagement attract different rights and responsibilities for the parties involved. Getting it wrong can expose your business to serious penalties and charges and careful consideration of the particular circumstances is required.
Employee v Contractor – the differences?
The following table highlights the key differences between an employee and contractor.
| Employee | Contractor | |
| Ability to subcontract or delegate | An employee cannot pay someone else to do the work | A contractor can subcontract or delegate the work |
| Payment | An employee is usually paid for the time worked or a price per activity / item or a commission | Contractors are paid for a result achieved based on a quote provided by the contractor to the business |
| Equipment and assets | The employer usually provides most or all of the equipment and assets that are needed to do the work, or provide an allowance or reimbursement for the same | The contractor provides most or all of the equipment and assets that are required to do the work and typically do not receive an allowance or reimbursement for the associated costs |
| Commercial risks | Employees take no commercial risk and the employer is legally responsible for the work done by the employee | Contractors take commercial risk and are legally responsible for their work. They are also liable for the cost of rectifying any defects in their work |
| Control over their work | The employer has the right to direct the way in which the employees do their work | Contractors have the freedom to choose the manner in which the work is done, subject to specific terms in the contracting agreement |
| Independence | Employees work within the business and are considered part of the business. They do not operate independently | Contractors operate in their own business independently and are free to accept or refuse additional work |
Penalties for getting it wrong
Incorrectly classifying a hire can expose your business to serious penalties and charges including:
- a PAYG withholding penalty for failing to deduct tax from staff payments;
- a superannuation guarantee charge, consisting of:
- superannuation shortfall amounts, being the amount of the superannuation contributions that should have been paid; and
- interest charges and an administration fee; and
- an additional superannuation guarantee charge.
When hiring someone new, in order to protect your business from unnecessary risk it is advisable to seek advice as to how your new hire is best classified. If you’d like to discuss your employment obligations further or seek assistance with preparing an employment or contracting agreement, please contact us.