Being a contractor offers flexibility, choice and more control over your schedule. It also means that you have different responsibilities from other employees that you may have to fulfil. We have a look at the age-old question of “Contractors Vs Employees”.
For employers, knowing the difference between a contractor and an employee is a must. It can lead to costly penalties if the two get confused.
An independent contractor operates under an ABN and is not an employee of the company they perform work for. They may also provide services to another person or business,
Sometimes an independent contractor may operate their own business and have many clients. In other cases, the independent contractor may only do work for one company.
Contractors Vs Employees
There are several factors that determine whether or not you may be classified as a contractor versus an employee. These can include:
- How much control you have over the work you are conducting for the business – the more control you have, the more likely it is an independent contracting relationship.
- Control over when you are working – employees have set hours in their agreement.
- Having other clients while working for this particular business.
- If you can delegate or subcontract the work to others.
- Responsiblity for your work and insurances – employees are covered by their employer, contractors are responsible for organising their own.
- An expectedation to have your own equipment prepared for the work you will be performing – employees will be provided with the equipment they need.
- If you bear financial risk for your errors. You might have to redo the work for no pay if you get it wrong.
ABN for the Win
In Australia, independent contractors often use the sole trader business structure when operating and conducting their business. Due to this, there is a legal requirement that you register an ABN for yourself or your business if operating as a contractor/sole trader.
Having an ABN is essential. It identities you and your business to the government and helps with tax and other business-related activities.
Not everyone may be entitled to an ABN (especially if they are an employee for the work they are performing). As a sole trader, though, you are starting or carrying on an enterprise.
For those who wish to contract you for services, an ABN means that there is no requirement to deduct tax. If you invoice an organisation without having an ABN, they by law need to deduct tax at the highest rate and declare the income you receive from them through to the ATO.
If you’re operating as an independent contractor or sole trader, losing a chunk of income to tax before payment isn’t something that you’re likely to want to happen. That’s why having an ABN is important for you, to ensure that that doesn’t happen.
Sham Contractors
If your business is looking into creating a working relationship with a contractor, you need to avoid falling into a sham contracting arrangement.
A sham contractor arrangement is when a business (or individual) tells a worker that they are an independent contractor. It can exist even if you treat the worker as an independent contractor in some ways, such as having an ABN and providing invoices like what a genuine independent contractor might have to do.
An Employer who is trying to avoid taking responsibility for paying legal entitlements to employees is illegal. It is unlawful to:
- tell an employee they are an independent contractor
- 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 hire them as an independent contractor to do the same work.
If you are concerned that you may be involved in a sham contracting arrangement or are an independent contractor looking to ensure that you remain compliant with your current obligations regarding tax, super or business, we can assist. We can also help you with dealing with an ABN.
