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Employee or contractor: Know the difference

Employers that incorrectly treat employees as contractors can face hefty penalties and charges as well as claims for entitlements and superannuation contributions.

Sham contracting arrangements, where an employer attempts to disguise an employment relationship as an independent contracting arrangement, are illegal and breach the Fair Work Act 2009.

Under the sham contracting provisions of the Fair Work Act 2009, an employer cannot:

Employers who engage in sham contracting arrangements can face serious penalties for contraventions of these provisions. The courts may impose a maximum penalty of $54,000 per contravention.

These businesses also risk penalties and charges from the Tax Office, including:

The ATO provides guidance to work out if a worker is an employee or contractor for tax and super purposes. Here are the key differences between employees and contractors:

Employee

Contractor

Ability to subcontract/delegate: the worker cannot 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 or commission.

Basis of payment: the worker is paid for a result achieved based on the quote they provided.

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 costs.

Equipment, tools and other assets:

  • The worker provides all or most of the equipment, tools and other assets

  • 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.

Commercial risks: the worker takes commercial risks and is legally responsible.

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 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.

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