It is important to ensure that you take clear steps to establish the difference between the two models of engagement.

Do you know the difference between an independent contractor and an employee?

Businesses often rely on a mix of employees and independent contractors in order to provide a range of goods and services.

The advantages of this strategy include greater flexibility and in some cases reduced costs.

In order to maximise the benefits of this approach, you will need to have a very good understanding of the differences between an employee and an independent contractor – or face severe financial consequences.

These consequences can include unpaid superannuation contributions and penalties, unfunded leave accruals, fines for not keeping proper employment records, and in the worse cases, prosecution for sham contracting under the Fair Work Act.

And while there is no one criterion that separates employees from independent contractors, it is important to make sure that you take clear steps to establish the difference between the two models of engagement.

Independent contractors are often taken on to complete specific projects and have a higher level of personal autonomy than employed staff members.

When it comes to negotiating set hours of work, the independent contractor will also have the ability to determine how long it will take to complete certain tasks, at what times they will be completed and how the work will be carried out.

There are a range of aspects to consider when determining if someone is hired on a true contractor or employee basis and unfortunately, there is no single clear test that can be used.

Both the Fair Work Ombudsman and the Australian Tax Office have established online calculators to help businesses determine the true nature of the legal relationship with people who perform work for them.

For example, some employers may be unsure as to whether they are expected to pay superannuation payments for a contractor and the ATO has a special tool to provide guidance on that area.

But different areas of law and government regulation provide different tests, so that a correct decision in one area doesn’t necessarily hold for another.

It is also important to be aware of the fact that whilst independent contractors are responsible for paying their own tax and GST (if registered) rather than having it deducted from their paycheque, doing so is not necessarily indicative that they are true contractors.

Payment methods are also different and while you may pay employees on a regular basis into a selected account, you will need to make sure that the contractor has a valid ABN (or withhold the necessary tax) and submits invoices for any work completed.

Free Download: Termination Letter Template

Need to let an employee go? Use our letter of termination template to ensure you are using the correct format. 

termination letter template