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Employee or independent Contractor?

When determining whether your prospective hire is an employee or independent contractor there are a number of factors to consider, not just whether they have an ABN.

I periodically receive calls from clients about workers with their own ABN (Australian Business Number) and whether hiring someone under such an arrangement is OK.

My advice is to first understand the difference between an employee and an independent contractor then make an informed decision, based on the circumstances. The simplest way to think about such an arrangement is this:

An employee works in your business and is part of your business. A contractor is running their own business.

Independent contractors provide agreed services under a contract for those services. They usually negotiate their own fees and working arrangements and can work for more than one client at a time. Independent contractors are often called contractors or subcontractors. Essentially, an independent contractor is their own boss.

Employees work in someone else’s business – the employer controls how, where and when they do their work, and pays them a wage.

Whether a worker is an employee or independent contractor is determined by the nature of the relationship, not what the arrangement is called. There are a number of common indicators which, when considered together, can help tell the difference between an employee and an independent contractor. These indicators include:

  • Intention of the parties
  • Ability to delegate or subcontract work
  • Amount of control over how work is performed
  • Financial responsibility and risk
  • Tools and equipment
  • Hours of work
  • Expectation of continuing work
  • Taxation arrangements
  • Superannuation
  • Annual leave and personal leave arrangements

To check if your worker is an employee or contractor, you need to consider the whole working arrangement. There are a number of factors that need to be considered, not just because the person has an ABN or issues invoices. There isn’t one factor that makes a difference on determination on its own.

The ATO offers an online resource called the employee/contractor decision tool to help you work out if your worker is an employee or contractor for tax and super purposes.

We’ve written previously about sham contracting…where an employer deliberately disguises an employment relationship as an independent contracting arrangement, instead of engaging the worker as an employee. This is typically done to avoid paying employee entitlements such as superannuation, workers’ compensation, leave, and certain taxes.

Whether an employer engages an employee as an independent contractor wilfully or unintentionally will make little difference to the Fair Work Ombudsman or the ATO…if an individual is considered an employee at law, you have a range of legal obligations and liabilities. May as well get it right first time, no?

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Note: Bare Bones Consulting provides HR services for employers. Employees seeking advice on workplace concerns should contact the Fair Work Infoline on 13 13 94.