Hiring Right: 7 Key Differences Between Employees and Contractors

Employees and Contractors: Key Differences for Business Owners

Hiring the right people is crucial for any business, and one of the most important decisions you’ll face is whether to engage someone as an employee or a contractor. Understanding the key differences between these two working arrangements can help you stay compliant with employment laws, workers’ compensation requirements, and superannuation obligations.

What is a Contractor?

Contractors are individuals who operate their own business and provide services to others. They typically:

• Use their own processes, tools, and methods to complete work
• Negotiate their own fees and working arrangements
• Work for multiple clients at a time
• Bear their own commercial risks

Starting a business? What kind of staff will you need – employees or contractors?

Differences Between an Employee and a Contractor

While employees work within a business and under its control, contractors operate independently. Here are some of the most important distinctions:

1. Control

Employees: The employer has the right to determine how, when, and where work is completed.

Contractors: They have the flexibility to decide how they perform their work, subject to general project guidelines.

2. Business Integration

Employees: Serve and represent the business as part of its structure.

Contractors: Provide services but primarily work to advance their own business interests.

3. Remuneration

Employees: Paid based on time worked, a per-item rate, or commissions.

Contractors: Typically engaged for a specific outcome and paid upon completion of the task, often on a fixed-fee basis.

4. Subcontracting or Delegating

Employees: Required to complete their tasks personally.

Contractors: Have the right to subcontract or delegate the work to others.

5. Tools and Equipment

Employees: The employer provides tools and equipment or reimburses expenses.

Contractors: Supply and maintain their own tools and equipment.

6. Risk and Liability

Employees: The employer assumes the financial risks of defects or workplace injuries.

Contractors: Bear their own commercial risks and are responsible for rectifying any defects.

7. Goodwill

Employees: Any goodwill created by their work benefits the employer.

Contractors: Retain goodwill and business reputation benefits from their services.

Workers’ Compensation Considerations

Employers must assess whether a worker qualifies as a ‘worker’ or ‘deemed worker’ under workers’ compensation laws:

Employees: Employers must include their wages in the declaration for workers’ compensation insurance.

Contractors: Generally, their wages are not included in the employer’s declaration. However, the principal contractor could be liable for the contractor’s workers’ compensation insurance unless a written statement confirms the contractor has their own coverage.

Recommendation: Contractors should obtain sickness and accident/injury insurance or income protection coverage.

Superannuation Obligations

Even if a worker is classified as an independent contractor, superannuation contributions may still be required in certain circumstances:

• If the contract is primarily for their labour
• If they perform domestic work for more than 30 hours per week
• If they are an artist, entertainer, sportsperson, or engaged in media production activities

Why Classification Matters

Misclassifying an employee as a contractor can lead to significant legal and financial consequences, including:

• Penalties for failing to provide employee entitlements
• Unexpected superannuation and workers’ compensation liabilities
• Damage to business reputation

Before hiring, it’s essential to assess the working arrangement carefully to determine whether the worker is an employee or a contractor. If in doubt, seek professional advice to ensure compliance and protect your business from potential risks.

For expert guidance on employment issues and business advisory services, contact Pretium Solutions today!

For more human resources (HR) advice, check out this blog: Business Owners: Help your employees grow your business – not cripple it

We also offer a Client Advisory Board service – a great resource for every business. You get industry experts (including HR specialists) in your very own board of advisers, ready to help make your business a success. To learn more about this exciting service, contact us.