Employee or Contractor

If you hire a worker you must check if they are an employee or contractor.

It’s important because:

  • it affects your tax, super and other obligations
  • penalties and charges may apply if you get it wrong.

If you previously hired a worker without checking, review your decision now to make sure you got it right.

ATO Decision Tool
Entities and Penalties

Some workers are always employees

Any of the following types of workers are always treated as employees:

  • apprentices
  • trainees
  • labourers
  • trades assistants.

Apprentices and trainees do a combination of work and recognised training to get a qualification, certificate or diploma. They can be full-time, part-time or school-based and usually have a formal training agreement with the business they work for, which is registered through a state or territory training authority or completed under a relevant law.

In most cases, they are paid under an award and receive specific pay and conditions. The work arrangement for apprentices and trainees is employment. You must meet the same tax and super obligations as you do for any other employees of your business.

Companies, trusts and partnerships are always contractors

An employee must be a person. If you’ve hired a company, trust or partnership to do the work, then it is a contracting relationship for tax and super purposes. The people who actually do the work may be directors, partners or employees of the contractor but they’re not your employees.

Labour hire or on-hire arrangements

If you have obtained your worker through a labour hire (or on-hire) firm and pay that firm for the work undertaken in your business, then your business has a contract with the labour-hire firm and they are responsible for the PAYG withholding, super and FBT obligations. Labour hire firms can be called different names including recruitment services and group training organisations (where your business is referred to as the ‘host employer’).

Hiring individuals

If you’ve hired an individual, it is the details within the working agreement or contract that determines if they are a contractor or employee for tax and super purposes. The agreement or contract your business has with the worker can be written or verbal.

Employees treated as contractors

It’s against the law for a business to incorrectly treat their employees as contractors. Businesses that do this are:

  • not meeting their tax and super obligations
  • denying workers their employee entitlements
  • illegally reducing their labour costs and gaining an unfair advantage over their competitors.

Penalties and charges

They risk penalties and charges, including:

  • PAYG withholding penalty for failing to deduct tax from worker payments and send it to us
  • super guarantee charge, made up of
    • super guarantee shortfall amounts made up of the amount of super contributions that should have been paid into a complying fund
    • interest charges
    • an administration fee
  • additional super guarantee charge of up to 200%.
Comparison

Difference between employees and contractors

An employee works in your business and is part of your business. A contractor is running their own business.

The table below outlines six of the factors that, taken together, determine whether a worker is an employee or contractor for tax and super purposes. Follow the links in the table for more information about each factor.

Employee or contractor
Employee Contractor
Ability to subcontract/delegate: the worker can’t subcontract/delegate the work – they can’t pay someone else to do the work. Ability to subcontract/delegate: the worker can subcontract/delegate the work – they can pay someone else to do the work.
Basis of payment – the worker is paid either:

  • for the time worked
  • a price per item or activity
  • a commission.
Basis of payment: the worker is paid for a result achieved based on the quote they provided.

A quote can be calculated using hourly rates or price per item to work out the total cost of the work.

Equipment, tools and other assets:

  • your business provides all or most of the equipment, tools and other assets required to complete the work, or
  • the worker provides all or most of the equipment, tools and other assets required to complete the work, but your business provides them with an allowance or reimburses them for the cost of the equipment, tools and other assets.
Equipment, tools and other assets:

  • the worker provides all or most of the equipment, tools and other assets required to complete the work
  • the worker does not receive an allowance or reimbursement for the cost of this equipment, tools and other assets.
Commercial risks: the worker takes no commercial risks. Your business is legally responsible for the work done by the worker and liable for the cost of rectifying any defect in the work. Commercial risks: the worker 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: your business has the right to direct the way in which the worker does their work. Control over the work: the worker has freedom in the way the work is done, subject to the specific terms in any contract or agreement.
Independence: the worker is not operating independently of your business. They work within and are considered part of your business. Independence: the worker 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.
Tax and Super

Your tax and super obligations

Your tax, super and other obligations will vary depending on whether your worker is an employee or contractor.

If your worker is an employee you’ll need to:

  • withhold tax (PAYG withholding) from their wages and report and pay the withheld amounts to us
  • pay super, at least quarterly, for eligible employees
  • report and pay fringe benefits tax (FBT) if you provide your employee with fringe benefits.

If your worker is a contractor:

  • they generally look after their own tax obligations, so you don’t have to withhold from payments to them unless they don’t quote their ABN to you, or you have a voluntary agreement with them to withhold tax from their payments
  • you may still have to pay super for individual contractors if the contract is principally for their labour
  • you don’t have FBT obligations.

Remember, it’s against the law to wrongly treat an employee as a contractor so you need to check that you’ve got it right. If you don’t get it right, penalties may apply.

Myths and facts

Myths and Facts

When working out whether your worker is an employee or contractor, don’t get caught out by the common myths.

Myth: If a worker has an ABN they’re a contractor.

Fact: Having an ABN makes no difference to whether a worker is an employee or contractor for a job. Businesses sometimes request or pressure a worker who is an employee to obtain an ABN in the belief this will make the worker a contractor. Often these businesses attempt to disguise the employment arrangement and make it look like contracting to avoid their PAYG withholding and super obligations. If the working arrangement is employment, an ABN will not make the worker a contractor.

Myth: Everyone in my industry takes on workers as contractors, so my business should too.

Fact: Just because other businesses treat workers as contractors doesn’t mean they have got it right. Ignore common industry practice when determining whether your worker is an employee or contractor.

Myth: Employees can’t be used for short jobs or to get extra work done during busy periods.

Fact: The length of a job or regularity of work makes no difference to whether a worker is an employee or contractor.

Both employees and contractors can be used for:

  • casual, temporary, on-call and infrequent work
  • busy periods
  • short jobs, specific tasks and projects.

Myth: A worker cannot work more than 80% of their time for one business if they want to be considered a contractor.

Fact: The 80% rule, or 80/20 rule as it is sometimes called, relates to personal services income (PSI) and can change how a contractor:

  • reports their income in their own tax return
  • claims some business-like deductions.

It’s not a factor a business considers when they work out whether a worker is an employee or contractor.

Myth: My business has always used contractors, so we don’t need to check whether new workers are employees or contractors.

Fact: Before hiring a new worker, you should always check whether the worker is an employee or contractor by examining the working arrangement. Unless a working arrangement (including the specific terms and conditions under which the work is done) is identical to a previous arrangement you’ve already checked, the outcome could be different. Hiring workers without checking the working arrangement could mean the business is incorrectly treating all future workers as contractors when they are employees.

Myth: If a worker has a registered business name, they’re a contractor.

Fact: Having a registered business name makes no difference to whether a worker is an employee or contractor.

Myth: If a worker is a contractor for one job, they will be a contractor for all jobs.

Fact: The working arrangement and specific terms and conditions will determine whether a worker is an employee or contractor for each job. A worker could be an employee for one job and a contractor for the next job.

Myth: My business should only take on contractors so we don’t have to worry about super.

Fact: Businesses may be required to pay super for their contractors. If you pay an individual contractor under a contract that is wholly or principally for the person’s labour, you have to pay super contributions for them.

Myth: Workers used for their specialist skills or qualifications should be engaged as contractors.

Fact: If a business takes on a worker for their specialist skills or qualifications it doesn’t automatically mean they’re a contractor. A worker with specialist skills or qualifications can be either an employee or contractor depending on the terms and conditions under which the work is done.

Myth: My worker wants to be a contractor, so my business should treat them as one.

Fact: Just because a worker has a preference to work as a contractor doesn’t mean your business can engage them as a contractor. Whether a worker is an employee or contractor is not a matter of choice, but depends entirely on the working arrangement and the specific terms and conditions. If you give into pressure and agree to treat an employee as a contractor, you can face penalties and charges for not meeting your tax and super obligations.

Myth: If a worker submits an invoice for their work, they’re a contractor.

Fact: Submitting an invoice for work done or being ‘paid on invoice’ doesn’t make a worker a contractor. To know whether a worker is an employee or contractor, you need to look at the whole working arrangement and examine the specific terms and conditions.

Myth: If a worker’s contract has a section that says they are a contractor, then legally they’re a contractor.

Fact: If a worker is legally an employee, a contract saying the worker is a contractor will not make the worker a contractor at law. Businesses and workers will sometimes include specific words in a written contract to say that the working arrangement is contracting in the mistaken belief that this will make the worker a contractor at law.

If a worker is legally an employee, a contract specifying the worker is a contractor makes no difference and will not:

  • override the employment relationship or change the worker into a contractor
  • change the PAYG withholding and super obligations a business is required to meet.
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