By Brett McEvoy

A problem faced by many employers is how to determine if the person they are paying for services falls under the category of an employee or a contractor. Another is which option is better suited to you as a business owner.

The main difference between an employee and a contractor is that an employee works as part of your business, whereas a contractor runs their own business and is hired to provide services to your business. A contractor has the ability to delegate/sub-contract their work to another party, i.e. pay another person or business to complete the job.

If the industry you are in requires equipment to complete tasks, employees are generally provided with tools by the business or receive a tool allowance or reimbursement for costs associated with purchasing the equipment. However, a contractor provides their own equipment that is necessary to complete the job and do not receive any compensation for this.

Contractors have the ability to complete the work at their own volition so long as they meet the terms of the contract. Contractors are legally responsible for the services they provide & are liable for costs of fixing any defects in their work. Whereas, as an employer you have the right to direct the employee on how you would like the work performed and the business is responsible for fixing any problems that occurred whilst completing the work.

In addition to the above differences between employees and contractors, there are differences to the way in which payroll is handled.

1. Payments to employees require Pay As You Go (PAYG) Withholding Taxes to be withheld from gross wages & reported on activity statements.
2. An employee is entitled to receive superannuation contributions paid to their superannuation fund.
3. Employees are also entitled to receive paid leave eg. annual, sick, and long service leave.

For WorkCover purposes there are three tests that are required to be met to see if a person comes under the category of a contractor. If a person is categorised as a contractor they are not required to be included in the calculation of the WorkCover premium. These tests also tie in with the Australian Taxation Office tests.

1. If the payment is made as the result of a specific outcome, not based on hourly or piecework rates.
2. The individual is required to provide their own equipment to complete the task.
3. The individual is liable for the costs associated with rectifying any defects that may have occurred in completing the job.

The Office of State Revenue has recently advised that it will be auditing various businesses to determine if their contractor payments should be included in the calculation of Payroll Tax.

It is harder to determine whether contractor payments are exempt for payroll tax purposes. In Queensland, there are nine exemption tests, of which only one needs to be met to ensure that only the labour component of the contract is included in the payroll tax calculation.

If you are unsure as to whether a person comes under the category of an employee or a contractor, there is a tool on the ATO website that will assist in distinguishing between them. Alternatively, you can contact our office.

Source of information: ATO; WorkCover