Is your business off the ground and successful? Need to hire people to help with the workload? This is an important decision and an important distinction because whether you hire an employee, or a contractor, will affect your businesses legal and tax responsibilities as well as the rights of the person you’re hiring. Not sure what your business needs? We, at Avenue Solutions, are here to help you with this.
There are 6 key factors that can help determine whether a worker is an employee or a contractor:
- Ability to Subcontract/Delegate:
This is a characteristic of a contractor because an employee cannot pay someone else to do the work. A contractor can take on the assigned tasks and then pay someone else to perform them.
- Basis of Payment:
Employee – paid for the time worked, a price per item/activity or on a commission basis. Contractor – paid for an achieved result based on a quote for the services to be provided.
- Equipment, tools, and other assets:
Employee – your business provides the worker with all or most of the equipment/tools required to undertake their work then they are most likely an employee. If your business does not supply this, then the Employees is then provided with an allowance or reimbursement for the cost of any equipment or tools.
Contractor – expected to provide all or most of the equipment/tools required to complete the work. They would also not receive any allowance or reimbursement for this.
- Commercial risks:
Employee – no commercial risk because your business would be legally responsible for the work done by the employee and therefore your business would be liable to rectify any defects.
Contractor – takes on the commercial risk of the work performed. That is, they would be liable for the cost of rectifying any defects in their work.
- Control over the work:
Employee – your business has the right to direct the way in which the worker does their work
Contractor – the worker has the freedom to decide how the work will be done, subject to specific terms in the contract/agreement.
Employee – does not operate independently of your business. They work within and are considered part of your business.
Contractor – the worker is operating their own business independently of your business. The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work.
Once you have determined whether your worker is an employee or a contractor then you will know your legal responsibilities:
Employee – need to set up the worker on your payroll system. Will need to deduct PAYG, pay superannuation, provide annual leave/sick leave, have workers compensation cover and be aware of any FBT related benefits.
Contractor – they look after their own tax obligations. You just pay their invoice. However, if they don’t quote their ABN to you then you may need to withhold 47% off the invoice and remit to the ATO.
There are hefty penalties to those businesses that treat their workers as contractors and not employees in order to avoid the legal responsibilities. Keep this is mind when deciding to hire workers.