Should I Hire a Contractor or Employee?

This is often not the question I hear. It is usually more the case of hearing “We have them engaged as a contractor, so we don’t need to worry.” Uh…maybe, but probably not.

Employee vs Contractor

Figuring out whether a new worker is an employee or contractor is one of the most confusing and potentially, risky questions that most small to medium sized businesses don’t properly consider. At the end of this article, you will hopefully be a little less confused than you already are.

What is the Difference Between a Contractor and Employee?

To put things simply, there is a saying that if it looks like a duck, walks like a duck and quacks like a duck – it’s a duck. The same can be said for employees. However, to help decipher whether a new worker is an employee or contractor, inspect some of the resources below.

Resources for Classifying Workers

  • Online Tests
    There are online tests to help you determine the differences between contractor or consultants and employees. One is the, Employee/Contractor decision tool on the ATO website. By answering the questions on this site, it will help determine whether the person you have engaged is an employee or not. It may also help you down the track (if you save the results, you can then produce the result in defense of any claim). It is not foolproof, but helpful.
  • Charts, Tables & Fact Sheets
    There are two useful tables to help you decipher between contractors and employees.

So you may be wondering why deciding to hire a worker as a contractor or employee is such an issue in the first place. Well in not properly classifying workers, business owners are putting themselves at risk. How are they doing this? Let me explain.

Risks Associated with Improper Worker Classification

Enforcing the Wrong Types of Employee Contracts

Sometimes a person is in fact a genuine contractor and so they should be engaged as such. However, without the right contract in place, the situation can become blurred. To have the proper contracts in place, an employer must first, properly define the worker’s role. This can be incredibly confusing with all of the terminology.

For instance, there are:

  • Full-time and part-time employees, who should both receive a contract of employment.
  • Casual employees, who also should receive a contract of employment.
  • Fixed term contract employees, who also receive a contract of employment.
  • Consultants, who are engaged as independent contractors
  • Independent contractors who don’t refer to themselves as consultants – although the terms can be used interchangeably, they also need a contract – but of course this should not be an employment contract.

Also, if you engage them as a contractor then start treating them like an employee, you can run into trouble – I don’t mean if you offer them Pam’s home-baked cookies at morning tea. What I mean is that if they need to turn up regularly at particular times that you stipulate (or even full-time), work on your systems and don’t work anywhere else etc.

So as you can imagine, in order to have the proper contract in place for those working for you, it is important to first understand – what constitutes an employee vs contractor.

Unfair Dismissal Claims

Engaging an employee means that you have 6 months before they qualify to apply for unfair dismissal (or twelve months if you have less than 15 employees). This is more than enough time to determine if the person is right for the job. This doesn’t mean there is no risk of dismissing someone (there is always some risk), but it makes it less risky.

Enabling Employees to Avoid PAYG Withholding Tax

You will see often that an employee has a preference to be a contractor. Sometimes this is their own ignorance of what the difference is or perhaps they just want more cash in their pocket earlier (because there is no PAYG tax deduction and potentially no requirement for superannuation to be paid by the employer/customer). This arrangement might seem to work for both parties, but can be fraught with risk.

Breaking Superannuation Rules for Employers

One more complication in relation to this question, in that an independent contractor could be considered as an employee for superannuation purposes. The ATO stipulates that if the contract is “wholly or principally for labour then superannuation is payable”.

Specifically, they are eligible if the person:

  • is paid wholly or principally for their personal labour and skills
  • must perform the contract work personally and is not able to delegate
  • is paid for hours worked, rather than to achieve a result

So, what to do in all of this?

My view is that spending time trying to be cute on this topic is a waste of time. If it looks like a duck, walks like a duck and quacks like a duck – engage it as one, well, you know what I mean. Where you should be spending your time and energy on is ensuring you have the right person, providing them a set of clear expectations for performance, invest in the right development and be a good leader and communicator. Do these things well and you are far more likely to succeed in your business.

The information contained in this article is general information only and not legal or taxation advice. Every circumstance is different and you should consult an appropriate professional for your situation before proceeding.


Start growing your business today

Push to Call
(03) 8564 8174

Request a Consultation