An employer's guide to employment arrangements part 2 - employees vs contractors



If you need an extra set of hands around your workplace, you will need to consider the question of whether you need to hire a contractor or an employee.


Engaging a contractor is very different to employing an employee (and vice versa). It is important that you consider the needs of your business, as well as the expectations of your new worker, to ensure you engage them correctly.


Hours of work


Employees are required to work the hours of work directed by their employer. An employee’s hours of work are usually determined by their employment status – an employee will be employed on either on a permanent (full-time or part-time) or casual basis. In the case of permanent employees, they are required to work a minimum number of hours per week at times and on days directed by the employer.


Conversely, contractors have control over the hours they work so long as they complete the work outlined in their contract within any specified time frames. There is unlikely to be any expectation that a contractor completes a minimum number of hours as contractors are paid based on the services that they provide (more on this later).


Quick summary

Employee

Contractor

​Hours of work (including minimum weekly hours, start and finish times and days) directed by employer

High level of control over hours of work

Payment for work


There is a different basis for payment if a worker is engaged as a contractor versus being employed as an employee.


Employees are always employed as individuals who are paid based on an hourly rate or annual salary. An employee’s pay rate is usually set out in their employment agreement. An employee must be paid a rate which is equal to, or higher than, the minimum rate of pay set out in the relevant Modern Award or National Minimum Wage. Employees are paid for their time worked. They are entitled to be paid for their hours worked whether or not they complete a job or task given to them by their employer.


However, contractors are paid based on the results that they achieve. They are usually engaged under an ABN (whether they are a company, sole trader or some other entity) and will invoice a business for the work completed. The terms of payment are usually set out in a contract which the contractor signs with the business or individual they are providing services to. Contractors can set the rate they are paid based on their expertise and cost of materials and will often charge GST.


Quick summary

Employee

Contractor

Engaged as individual



Paid for time worked


Rate of pay set by the employer and in accordance with minimum wages set by the government


Payment for work is not dependent on whether task or job is completed

Engaged as company, individual or another entity usually under an ABN


Paid for result achieved


Rate of pay based on quote determined by contractor for their profit margins and costs of materials


Payment for work is dependent on the contractor rendering an invoice to the business once the work has been completed

Level of control and direction


Employees are considered part of their employer’s business – they are required to carry out tasks directed by their employer using processes that are approved by their employer. In simple terms, employees are (generally speaking) required to do what they are told in the way in which they are told!


Contractors, on the other hand, have a lot more freedom. They can delegate work to their own subcontractors, complete the work using their own processes and procedures and operate their own business independently. While a business will generally tell a contractor what jobs they need the contractor to do, the contractor has the ultimate control as to how these jobs are done.


Quick summary

Employee

Contractor

High level of control and direction from employer – how and when jobs completed


No ability delegate work



Works within and is considered part of the employer’s business

Low level of control and direction from business – free to decide how work is completed


Ability to delegate work to subcontractors (pursuant to the terms of their agreement)


Operates their own business independent of the employer

Commercial risks


An employee is not required to take out their own insurance and does not usually assume the commercial risk for their work. In Queensland, employers are required to take out insurance which covers employees for work related injuries. Some employers can self-insure which means they can manage and pay for their own costs.


Some employers, particularly those who operate a business which provides professional advice (such as accountants, IT specialists, advertising agencies and law firms), usually take out professional indemnity insurance. This covers mistakes made by the employer (and its employees) which have caused a client to suffer financial loss – for example, missed deadlines and breaches of professional duties.


Unlike employees, contractors take on the commercial risks of their work. They will usually be responsible for taking out their own insurance policies to cover them for accidents or mistakes which may occur in the course of providing their services. If the contractor has a contract in place with a business or individual they are providing services to, the contract may require that the contractor take out a minimum cover of public liability and professional indemnity insurance and provide evidence of the policy’s currency. If a contractor makes a mistake or their work is defective, they are responsible for the costs incurred as a result of their error.


Quick summary

Employee

Contractor

Employees usually take on no commercial risks


Actions and / or omissions of employees are usually covered by the employer’s public liability or professional indemnity insurance


Employer usually remains legally responsible for their employee’s work


Employer usually liable for the costs incurred as a result of their employee’s mistakes or defective work

Contractors take on commercial risks



Actions and / or omissions of contractors are covered by the contractor’s own public liability or professional indemnity insurance


Business is not legally responsible for their contractor’s work


Contractor liable for the costs incurred as a result of their own mistakes or defective work

Tools and equipment


If employees are required to use tools and equipment to complete their job either:

  1. their employer must provide them with all or most of the required equipment or tools; or,

  2. if the employer does not provide these items, the employee would need to provide the required tools and equipment and then be reimbursed by the employer or otherwise provided with an allowance in accordance with any relevant applicable modern award.

Contractors do not have such options. It is up to the contractor to purchase the equipment and tools they need to complete the agreed work and there is no obligation for the business to reimburse for this purchase. Contractors will usually account for the cost of these items in their rate of pay or quote.


Quick summary

Employee

Contractor

​Employer is responsible for providing tools and equipment (or reimbursing employees for this cost)

Contractor is responsible for purchasing tools and equipment for the required work

Leave and superannuation entitlements


Employees are usually entitled to paid leave entitlements, such as annual leave and personal, in accordance with the National Employment Standards. Employees may also be entitled to long service leave, depending on the relevant long service leave laws in their state or territory. Employers are also obligated to make superannuation contributions on behalf of their employee to the fund of the employee’s choice.


Contractors are not entitled to paid leave entitlements. Some contractors who are engaged mainly for their labour may be considered employees for superannuation guarantee purposes and entitled to be paid superannuation. Businesses should confirm whether or not they are required to pay superannuation to their contractors using the details on the Australian Taxation Office website.


Quick summary


Employee

Contractor

​Usually entitled to leave entitlements


Employer is obligated to make superannuation contributions on behalf of employer

Not entitled to any leave entitlements


Business engaging a contractor may be obligated to make superannuation contributions to contractor if engaging mainly for their labour

Finally – Make sure it is clear in the contract!


Recent court decisions have made it clear that the terms of the agreement engaging a worker are important when answering the question of whether or not that person is an employee or a contractor.


In particular, these decisions outline:

  1. calling a worker an ‘employee’ or a ‘contractor’ in a contract is not the determinative factor as to whether a worker is in fact an ‘employee’ or a ‘contractor’. If a worker’s duties and rights contained in the contract are inconsistent with this label, then the label is virtually meaningless; and

  2. the terms of the contract take precedence when determining whether a worker was engaged as an ‘employee’ or a ‘contractor’ at that time. While what happens in practice from this point onwards may be relevant, contract is king!


You can read more about this distinction in our recent article - When contract is king: An overview of two recent employment decisions of the High Court.


Key takeaways


Businesses can get into a lot of trouble if they engage a worker incorrectly. Both employees and contractors have specific entitlements, methods of work and levels of control which need to be considered when you decide what is best for your business.


If you need assistance preparing contracts for the engagement of employees or contractors or conducting a review of your current employment arrangements, the employment team at Shand Taylor Lawyers is here to help.


John Sneddon, Director (07) 3307 4504 jsneddon@shandtaylor.com.au


Ruby Nielsen, Senior Associate (07) 3307 4551 rnielsen@shandtaylor.com.au


Emma Lewis, Lawyer (07) 3307 4546 elewis@shandtaylor.com.au


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