Contractor or Employee…. and What Difference Does It Make?


Is that person working in your office a contractor or an employee? Are you an employee or contractor?

Why does it matter? Well, if a person is an employee, they will be entitled to all the benefits that come with being an employee – annual leave, personal leave, long service leave (eventually), Superannuation Guarantee Contributions etc, etc.  If a person is a contractor, they might not be entitled to these benefits.  If a person is an employee, then the Australian Taxation Office expects you to deduct Pay as You Go amounts from the employee’s wages.  Further, the hourly (or otherwise calculated) rate that must be paid to a person may differ depending on whether the person is an employee or a contractor.  Finally, whether or not workers’ compensation and payroll tax must be paid and the amount that must be paid, may depend on the status of the person.

Whether a person is an employee or a contractor is one of the more contentious issues in tax law – as well as in employment law and this issue is also currently a political hot potato.  In some cases, it is crystal clear what the status of the person is, in many other cases it is not, despite many attempts to clarify the law on this matter.

Whilst covering all the contractor vs employee issues is well beyond the scope of this article, it might be worthwhile to dispel a few myths.

Myth no. 1 – if a business draws up a contract that says a person is a contractor, and that person signs the contract, then that person is a contractor. Wrong!  An employee is an employee is an employee.  You cannot change the nature of a relationship, or get around the law, by calling something what it is not.  An employer cannot avoid its employment obligations by pretending an employee is a contractor.

Myth no. 2 – if a person has an Australian Business Number, they are a contractor.  Wrong! Refer to the explanation for myth no. 1!

So – employee or contractor? –  is a very complex issue and something you should discuss with us if you have any concerns. The costs of getting it wrong can be considerable for an employer.  For example, if a business treats somebody as a contractor when they are in fact an employee, the consequences might include having to make Pay as You Go withholding amounts to the Australian Taxation Office, to pay additional Superannuation Guarantee Contributions, to pay annual leave and long service leave, and to pay more payroll tax and workers’ compensation.  It is not worth getting it wrong.

To finish, let me also quote one more related myth – that if a person is a contractor you do not have to pay Superannuation Guarantee Contributions for that contractor.  Wrong! If a contract is wholly or principally for a person’s labour, Superannuation Guarantee Contributions must be paid.

Welcome to the employee vs contractor minefield!

The information contained herein is of a general nature only and is not intended to be relied upon nor is it a substitute for appropriate professional advice. Whilst all care has been taken in the preparation of the material, it is not guaranteed to be accurate. Individual circumstances are different and as such, require specific examination. Asparq cannot accept liability for any loss or damage of any kind arising out of the use of or reliance upon all or any part of this material. Additional information may be made available upon request.