Hiring employees versus contractors: What you need to know

It can be tricky to understand the complexity that surrounds what makes someone an employee and what makes them a contractor. So, what are the key differences between the two, and what do employers need to know?

There are many distinct elements that differentiate between an employee and a contractor, however these differences are not always clear to employers. 

What is an employee?

An employee is someone who works in an employer’s business under the direction and control of their manager at the organisation. Employees usually work for a set number of hours per week.

What is a contractor?

A contractor operates his or her own enterprise independently of an employer’s business and usually work as many hours as it takes to complete a particular project.

“Contractors may work for many businesses rather than a single ‘employer’ and have a high level of control over how the work is done,” says Benjamin Marshall, a partner in workplace relations and safety at law firm Holding Redlich.

“Contractors will usually bear the financial risk for making a profit or loss for each engagement and generally have the ability to subcontract or delegate their work to another person. They are also liable for defects with their work.”

Contractors also usually have a specialised skill that the employer desires for a short amount of time (such as an electrician).

The legal differences between employees and contractors

There are significant differences that stem from the different nature of engaging either an employee or a contractor.

Employees

“Employees have significant legal protections,” says Marshall, “including rights to paid leave, to minimum notice of termination and various potential rights to challenge the termination of their employment.”

However, these protections do not automatically apply to all employees at all times. Casual employees, for example, are not usually entitled to paid leave or notice termination.

Contractors

Contractors do not have the same protections as employees. As they are usually responsible and liable for poor performance or any injuries sustained while performing the task, they tend to have their own insurance policy.

“It is possible that contractors receive no leave, may have their engagement terminated without any notice period and are unable to challenge that termination,” says Marshall.

Contractors also tend to pay their own superannuation and tax, and use their own tools and equipment.

Why employers need to know if they have employees or contractors

There can be significant legal risks associated with getting it wrong.  Marshall says if employers are in doubt as to whether an individual is an employee or a contractor, it is usually safer to engage them as an employee. “Significant penalties and other liabilities may apply for getting it wrong,” he says.

Myths about engaging a contractor

“There is a common misconception that if a person’s contract says they are a contractor and they issue invoices or hold an ABN then that automatically makes them a contractor,” says Marshall. “This is not the case and ignores the complex factual assessment required.”

Marshall says another common misconception is that naming a corporation as the contractor and having that corporation notionally engage the ultimate worker will avoid all potential liability for the employer. “This is not true and there have been numerous instances where the courts have looked past the interposition of a corporate entity and found the worker to be the employer’s employee,” he says.

Ultimately the assessment as to whether an individual is an employee or an independent contractor can be very difficult.

“If you are engaging contractors in circumstances where there is any doubt, it is important you engage a lawyer,” Marshall says. “Every engagement must be assessed on its facts.”