A contractor is someone who runs their own business and provides services to your business.

An employee, on the other hand, is part of your business.

Some businesses believe that workers are contractors if:

  • They have an ABN
  • You only need them for a short period of time or to help out in busy periods
  • They have a written contract that says they are a contractor
  • They have specialist skills or knowledge that you need.

None of these things will make a worker a contractor if they are really an employee.

So what does make a person a contractor?

There is no single thing – the whole relationship needs to be considered. For example, contractors can often delegate the work – this means they pay someone else to do the work instead of doing it themselves. Sometimes employees can swap shifts or organise a substitute in their place, but this is not the same as being able to delegate the work. Your business still pays the substitute.

Contractors run their own business and take commercial risks. They are part of the tax system and need to keep proper business records.

Contractors are used to achieve a specific result. They are not paid according to the hours spent, regardless of whether a specific result is achieved.

Are there penalties if you get it wrong?

If you are treating your workers as contractors wrongly, there are penalties for not withholding tax, paying super and other employment entitlements.

Visit the Australian Taxation Office (ATO) website: https://www.ato.gov.au and search for

‘employee or contractor decision tools’.

Avoid fines and extra payments by discussing with your accountant whether your contract workers should be regarded as employees.

Source: ATO website