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Employee vs Contractor 

In order for a business owner to avoid disputes with its staff over wages and other entitlements, it is important that it clearly identifies on what basis it will be engaging their staff from the outset.

Once the business owner can define the relationship with its staff member, it will know what responsibilities it has to them. Provided the business owner carries out those responsibilities, it will significantly reduce the risk of their staff member pursuing them for an underpayment of wages / entitlements or another similar claim at a later date.

The most common relationships a business owner will have with its staff is either hiring them as an employee or a contractor.

Often a business owner engages a worker as a contractor for the purposes of saving money on entitlements, tax and superannuation payments, but will otherwise treat the worker as an employee. If this occurs, the worker may be able to make a claim against the business owner to say that he or she has been incorrectly titled a contractor when in fact they are an employee. Accordingly, they make their claim for underpayment of wages and / or other entitlements, which he or she would have received if they were properly engaged by the business as an employee. Provided the worker can properly substantiate his or her claim, they are likely to be successful. In this circumstance, the business may be ordered to pay a significant amount of money to the worker.

The difference between a contractor and an employee can be tricky to distinguish. This article provides a simplified list of the main differences between the two.

PaymentAn employee is paid in accordance with its contract and any relevant Award or legislation.A contractor is paid for a result achieved that is set out in a quote or invoice for a job or set project.
Leave entitlements An employee has leave entitlements as set out in its contract and any relevant Award or legislation.A contractor has no leave entitlements
Tax and Superannuation An employer will pay an employee’s tax and superannuation.A contractor is responsible for his or her own tax and superannuation.
Control over workAn employee works under the direction of his or her employer.A contractor is in control of how and when they work subject to any conditions which may be agreed with the business owner under a contract.
Ability to subcontract An employee cannot subcontract or delegate its responsibilities to a third party.A contractor can subcontract or delegate its responsibilities to a third party.
Commercial and financial risk An employee bears no commercial and financial risk as the employer is legally responsible for all works carried out by its employees.A contractor bears all commercial and financial risk as it is legally responsible for the works he or she has carried out.
Equipment, tools and assets An employer will either provide the employee with all equipment, tools and assets required for him or her to carry out required works or will reimburse or compensate the employee if they were to provide their own equipment, tools and assets required for him or her to carry out required works.A contractor is required to provide its own equipment, tools and assets in order to carry out required works.
Representation An employee will represent the business of its employer.A contractor will represent its own business.

Should you be a business owner looking to expand your team, and are confused about what type of staff engagement best suits your business or what your obligations may be, please do not hesitate to contact us on (08) 8333 2130 so we can assist you.  If you get it right from the start it can save you a lot of stress and money in the long run.

This blog was written by Michelle Moore, Associate at Clarke Hemmerling Lawyers.

This blog post does not constitute legal advice and should not be relied upon as such. It is a general commentary on matters that may be of interest to you.  Formal legal or other professional advice should be sought before acting or relying on any matter arising from this communication.