Distinguishing between an employee and an independent contractor is vital for compliance with tax and superannuation laws. A simple contract label is not enough; the actual work relationship and duties performed are what define the status. Below, we outline the key differences to help you understand where you or your workers may stand. Just because an agreement states that a worker is an independent contractor, this does not mean that they are a contractor for tax and superannuation purposes, new guidance from the ATO warns.
Where there is a written contract, the rights and obligations of the contract need to support that an independent contracting relationship exists. The fact that a contractor has an ABN does not necessarily mean that they have genuinely been engaged as a contractor. The ATO mentions –
“at its core, the distinction between an employee and an independent contractor is that:
- an employee serves in the business of an employer, performing their work as a part of that business.
- an independent contractor provides services to a principal’s business, but the contractor does so in furthering their own business enterprise; they carry out the work as principal of their own business, not part of another.”
Here are the basic differences as pointed out by the ATO:
| Employee | Independent contractor |
| Control: your business has the legal right to control how, where and when the worker does their work. | Control: the worker can choose how, where and when their work is done, subject to reasonable direction by you. |
| Integration: the worker serves in your business. They are contractually required to perform work as a representative of your business. | Integration: the worker provides services to your business. The worker performs work to further their own business. |
| Mode of remuneration: the worker is paid either:
1. for the time worked, |
Mode of remuneration: the worker is generally contracted to achieve a specific result, and is paid when they have completed that result, often for a fixed fee. |
| Ability to subcontract or delegate:
there is no clause in the contract allowing the worker to delegate or subcontract their work to others. The worker must perform the work themselves and can’t pay someone else to do the work for them. |
Ability to subcontract or delegate:
there is a clause in the contract allowing the worker the right to delegate or subcontract their work to others. The clause must not be a sham and must be legally capable of exercise. |
| Provision of tools and equipment: your business provides all or most of the equipment, tools and other assets required to complete the work; or the worker provides all or most of the tools, but your business provides them with an allowance or reimburses them for expenses incurred. | Provision of tools and equipment: the worker provides all or most of the equipment, tools and other assets required to complete the work, and you do not give them an allowance or reimbursement for the expenses incurred. The work involves the use of a substantial item that your worker is wholly responsible for. |
| Risk: the worker bears little or no risk. Your business bears the commercial risk for any costs arising out of injury or defect in their work. | Risk: the worker bears the commercial risk for any costs arising out of injury or defect in their work. |
| Generation of goodwill: your business benefits from any goodwill arising from the work of the worker. | Generation of goodwill: the contractor’s business benefits from any goodwill generated from their work, not your business. |
