Published on 23/10/2020 by Any Business.Com.Au

The Difference Between an Independent Contractor and an Employee

Independent contractor, contractor, subcontractors, subbies. Employees, staff, workers. It doesn't really matter what you call yourself, but whether you're classified an independent contractor or an employee is an important distinction. And using the wrong term can have severe ramifications.

But just what is the difference between an independent contractor and an employee? Is one better than the other? And how should you be classified? We've written this post to give you a better idea of your role and obligations under each category, which one may work be better for you, and why you need to differentiate.

The simple truth is that the difference between an independent contractor and an employee isn't always clear cut. Indeed, any number of factors can determine your status: there's no one identifier that fits you into one category or the other.

Since independent contractors and employees have different legal and tax obligations, it's important you understand which one both you and your employees fit under.

The biggest different between independent workers and employees is in the level of control over work: an employee is much more likely to be at the behest of whoever is paying you, whereas an independent contractor is more often in control.

Independent Contractor

An independent contractor is typically an entity – which can be any of the 4 main types of business structures – which offers a service or product for an agreed price.

Independent contractors generally have a lot of control over the operations of their business. They usually: Run their business Can accept or refuse work Negotiate their own fees (don't have a minimum wage or pay rate) and working arrangements Provide their own tools and equipment Pay their own superannuation, tax, and GST (and don't get paid leave) Pay others to perform work on their behalf Have an Australian Business Number and submit invoices Can work for many clients at once * Are directly impacted by the profits and losses of the business

The rights and entitlements of independent contractors are protected by the Independent Contractors Act 2006. For a range of helpful tools for independent contractors, visit Business.gov.au.

Employee

An employee is usually hired by an entity to perform work on their behalf. Employees typically: Are directed and controlled by their employer Work standard hours Have security in ongoing work Are paid regularly for the time they work based on an award or agreement (and receive entitlement such as super contributions, and paid leave, including sick, annual, recreation, and long service leave) Can't pay another person to do their work for them Can't be affected by profits or losses of the business * Have income tax deducted by their employer

Avoiding Shams

You can face sever ramifications if you engage independent contractors when they're really employees. This is called sham contracting and is a serious offence.

Shame contracting includes: Claiming an employee is an independent contractor Saying something false to convince an employee to become an independent contractor Dismissing an employee and re-employing them as an independent contractor, even though the work is the same Dismissing or threatening dismissal if an employee refuses to become an independent contractor.

Sham contracting allows employers to avoid having to pay legal entitlements to employees. The Fair Work Ombudsman is set up to protect the rights of both employees and independent contractors, and handles complaints from employees and independent contractors who feel they're being abused. Penalties for sham contracting can be as high as $51,000 per infringement. For more information, visit Fair Work Australia and the Australian Tax Office.

AnyBusiness.com.au

Mary is the founder of AnyBusiness.com.au. She has a degree in Business from Monash University and been helping showcase businesses for sale for over 10 years. In the course of running her own business and working daily with business owners and brokers she has developed a keen sense of the Australian market for businesses for sale and shares her knowledge on this blog and others such as female.com.au

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