Am I an employee or contractor? 

By Stephen Arulogun

For tax purposes, an employee is an individual who works in the business of another individual or company and is part of that business, whereas an independent contractor is an individual running their own business.

Independent contractors provide agreed services under a contract for services. They usually negotiate their own fees and working arrangements and can work for more than one client at a time. Employees work in one business under the direction of a manager and are employed under a contract of service

Sham contracting

Sometimes a business may hire a worker and describe them as an independent contractor, when in fact they are an employee of the business. If the business knew (or was reckless as to whether) the worker was an employee, this work arrangement may be a sham contracting arrangement. A sham contracting arrangement may exist even if the worker is treated like an independent contractor in some ways (for example, the worker may be required to have an ABN and submit invoices like a genuine independent contractor would).

Sham contracting is illegal. It’s illegal to:

  • tell an individual that they are an independent contractor, if the nature of the working relationship is really one of employment
  • say something false to convince an employee to do the same work for the employer but as an independent contractor
  • dismiss or threaten to dismiss an employee if they don’t become an independent contractor, or
  • dismiss an employee and rehire them as an independent contractor to do the same work.

Sham contracting arrangements are sometimes set up by employers who are trying to avoid responsibility for paying legal entitlements to employees. Penalties for sham contracting can be imposed by the courts. The maximum penalty is $13,320 for individuals and $66,600 for corporations, per contravention (from 1 July 2020).

Employee or contractor checklist

Which one are you?

  • Tools, equipment and uniform – an independent contractor uses their own tools and equipment, and they don’t wear the uniform of the employer (they may wear their own uniform). An employee generally uses the tools provided by their employer. If they are required to provide their own tools, they are entitled to allowances under the relevant modern award. Employees may or may not wear a uniform.
  • Invoices and ABN – independent contractors have an ABN and give invoices to the company. Employees are paid on a regular basis without needing to invoice and give the employer timesheets at the end of each pay cycle.
  • Leave – employees are entitled to paid annual, personal and long service leave. There is no paid leave for contractors.
  • Control over tasks – a Manager will provide direction for their employee to complete tasks. An independent contractor will have more control over how/when they work. Contractors may also sub-contract the work out to a third party (although the contract for services may prohibit the subcontracting of services).
  • Work hours – unless they are a casual employee, an employee will usually have set hours, whereas an independent contractor can often decide their hours of work.
  • Superannuation and tax – employees have their super and tax arranged by their employer. However, most contractors need to make their own super contributions. Contractors must also organise tax payments to the ATO. A business may be liable to pay superannuation to its contractors in certain circumstances. For more information, read “Are independent contractors entitled to WorkCover protection and superannuation?”

Courts look at the whole relationship between the parties when determining if a person is an employee or an independent contractor. If you are being paid as a contractor but you fit more into the employee category, you should contact us for further advice.

If you are an employer and have concerns about what steps need to be taken to correctly designate an employee or contractor, IR Advocates can help you. For more information call us today on 1300 415 464 or email us.

If you are an employee or contractor and are concerned that your workplace rights are being infringed, call us today on 1300 415 464 or email us.