Employee or Contractor: What is the key difference?

Are you an employee or contractor

So you may be wondering, am I either an employee or contractor? Generally, an individual person paid mainly for their labour is an employee.  This is the case even if the individual quotes an ABN. However, if the person operates through a company, trust or partnership, that entity is a contractor regardless of the basis of its remuneration.

Note that the use of a business name – for example, Alan Stone who uses the name Morvada – does not of itself answer whether or not the person is operating through a company, trust or partnership. A search of the business name may be necessary to determine who or what is the underlying entity.

For individuals, the test relates to the terms of their engagement and payment. The ATO has a specific online tool to determine – by reference to the terms of a person’s engagement – whether he or she should be regarded as a contractor or employee. This tool can be referenced at:-

https://www.ato.gov.au/Calculators-and-tools/Host/?anchor=ECDTSGET&anchor=ECDTSGET/questions/ECDT#ECDTSGET/questions/ECDT

The ATO tool poses various questions as follows to help distinguish between an employee and contractor:-

1. Can these individuals delegate work to someone else and pay that other person for doing the work?  NO = employee.
2. Are these individuals paid either for the hours worked, the price per item or activity or a commission?  If YES = employee (although sometimes a contractor if not by hours worked).
3. Does your business provide these individuals with equipment and tools to conduct their work, OR does your business reimburse these individuals for equipment and tools required to conduct their work?  If YES = employee.
4. Does your business take responsibility for the work conducted by these individuals and the cost of rectifying any defects in their work?  If YES = employee.
5. Does your business have the right to direct the method by which these individuals must conduct their work?  If YES = employee.
6. Are these individuals considered to work within and as part of your business (performing the duties detailed in their contract with you, and not having the ability to accept or decline additional work allocated)?  If YES = employee.

Superannuation Guarantee

Therefore, if your answers to the above questions are in line with these people being employees rather than contractors, you are likely required to pay superannuation for each of them.

Payroll Tax

The Queensland Government (Business Queensland) website states you may have to pay payroll tax on payments to contractors engaged in “relevant contracts”.  A relevant contract is any kind of arrangement where a person –

1. Supplies services;
2. Is supplied with the services;
3. Re-supplies goods (supplying goods to someone else who performs a service in relation to those goods, and then give the goods back either in an altered form or as other goods which incorporate those goods).

Exemptions apply if any of the following are relevant –

1. Your business requires the services provided for less than 180 days per financial year;
2. The person provides those services to you for no more than 90 days per financial year;
3. The person engages others to provide services they are contracted by you for, or if two or more persons are required to fulfil the purpose of the contract;
4. Your contract with the person is to supply goods and the labour or services provided are only incidental to that;
5. Your business does not usually need the services, and the person provides the same type of services for the general public and derives less than 40% of their gross trading income from your business in that financial year;
6. If that person provides similar services independently to the general public;
7. If that person carries goods in their own vehicle and only provides incidental services;
8. If your business hires that person to sell door-to-door goods for domestic purposes;
9. If your business is an insurance company and hires that person to sell insurance for you, commissions paid to that person are exempt.

Therefore, unless any of the above exemptions apply, you are likely to have to pay payroll tax in respect of their remuneration paid to “contractors” supplying services to your business.

For further information see:- https://www.business.qld.gov.au/running-business/employing/payroll-tax/taxable-wages/contractors/relevant-contracts