Do you run a business and have or are thinking about hiring workers? If so, it’s important to understand the difference between contractors and employees, as you have different tax and superannuation responsibilities depending on the status of the worker.
What’s the difference between contractors and employees?
Generally speaking, an employee works in your business and is part of your business. A contractor is a person who is typically running their own business and the business engaging their services has little direction or control in respect of how that service is supplied.
The table below provides six key factors that determine whether a worker is an employee or contractor for tax and superannuation purposes.
Your tax and super obligations
Your tax, superannuation and other obligations will vary depending on whether your worker is an employee or contractor. The table below summarises the key considerations.
The High Court’s new employee/contractor test
The High Court has delivered several decisions which confirm that when determining whether a person is an employee or contractor, it is necessary to look to the legal rights and obligations agreed under the relevant contract, rather than what happened in the working relationship as it unfolded.
This is in contrast to the previous practice adopted by courts and tribunals whereby the actual circumstances of how the arrangement played out in real life (on the facts, not the contract terms) was decisive. In other words, the written agreement (the contract) will determine the nature of the relationship, rather than examining the subjective circumstances. This is unless the contract is a sham and does not reflect the circumstances of the arrangement.
Review your contracts with your workers
It is important that business owners understand the difference between employees and contractors. Businesses should review their written contracts with employees and contractors to ensure that the contracts correctly give effect to the arrangement the parties understood was being entered into when the contract was formed. If you have any questions or would like to discuss the content of this article further, please contact us.
Content in partnership with Tax & Super Australia.