I’ve lost count of how many times I’ve heard businesses tell employees to go and get an ABN, and they will pay them as a contractor. Simply having an ABN does not mean that they are a contractor. If it looks and feels like an employee, then it’s an employee.
If you look to hire a worker, you must check if they are an employee or contractor. It is important to get the classification right because it affects your tax, super and other obligations, and penalties and charges may apply if you get it wrong.
An employee works in your business and is part of your business, while a contractor runs their own business. There are factors that I will discuss, that taken together, determine whether a worker is an employee or contractor for tax and super purposes:
Ability to subcontract/delegate work:
If an employee is unavailable to work, the employee can’t subcontract/delegate the work. They can’t pay someone else to do the work. The employer organizes a replace staff member to cover their work.
If unavailable to work, a contractor can pay and delegate the service to someone else.
Basis of payment:
If you pay the worker a set amount each period, such as an award rate, annual salary, or an hourly rate for the time they work, they would be considered an employee.
If you pay the worker for delivering an agreed result based on a quote provided, they would be considered a contractor.
Equipment & tools:
If your business is responsible for providing the equipment & tools such as drills, saws, etc. to enable them to deliver the product/service, or if the worker provides all their own tools & equipment, but the business provides a tool allowance or reimbursement of the cost, then the worker is considered an employee.
Whereas, if the worker is responsible for providing the equipment & tools such as drills, saws, etc., for enabling them to deliver the product/service and there is no tool allowance or reimbursement, the worker is considered a contractor.
The employee does not take the commercial risk. The business is legally responsible for the work done by the worker and liable for the cost of rectifying any defect in the work.
A contractor takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work.
Control over the work:
As an employee, the business has the right to direct how the worker does their work.
Subject to the terms of the contract, the worker has freedom in work.
As an employee, you’re not operating independently of the business. They work within and are considered part of your business.
A contractor is operating their own business independently of your business. The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work.
Companies, trust and partnerships:
An employee must be a person. If you’ve hired a company, trust or partnership to do the work, this is a contracting relationship for tax and super purposes. The people who do the work may be directors, partners or employees of the contractor, but they’re not your employees.
Applying these factors to your situation will help determine whether the worker is an employee or a contractor for tax and super purposes.