A contractor is someone you engage to perform work or a task for you who is not an employee. Their engagement is often referred to as a contract for services. Features common to contractors are that the contractor can set a price, a contractor may be paid for an outcome, rather than an hourly rate, and the contractor is in control of how the work is undertaken and can accept or reject work tasks.
An employee is often referred to as being in a contract of service. Employees are often paid by the hour, or on a set salary, regardless of the outcome of their work. An employer can dictate to an employee how, when and where an employee works (within reason, and within the terms of the employment agreement).
There are many reasons a business might engage a contractor rather than an employee. In relation to an employee, businesses:
- Need to pay PAYG and superannuation;
- Owe a high, non-delegable duty of care (ie more likely to be liable to them if they are injured);
- Are required to have a workers’ compensation policy covering the employee;
- Are vicariously liable for their actions (that is, if they do something wrong, it will be taken that the business did something wrong).
Generally, none of the above statements are true for independent contractors. Contractors are also easier to terminate if you either no longer need them, or if you simply don’t like their work.
However, just because you call someone a contractor does not mean that they are. The High Court recently considered two separate matters where workers were described, in written agreements, as contractors. In one matter the Court found the workers were contractors, but in the other the Court found that the worker was an employee.
Getting the classification right is important, not only in relation to taxation and superannuation purposes, but also insurance and risk. The mix of employees’ vs independent contractors can change the risk profile of a business. If you have been asked disclosure questions about the number of staff you employ, or significant contracts at policy inception or renewal, your insurer has taken that into account when determining the policy premium and the policy terms.
If you are concerned about the classification of any of your employees or independent contractors, seek legal advice and then speak with your broker.