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Important Differences Between Contractors and Employees

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Important Differences Between Contractors and Employees

Once your business begins to grow, it’s time to look at expanding your team. A common challenge at this point is understanding the difference between contractors and employees and what obligations are owed to each.

Getting this wrong could cost you thousands in back-pay and penalties. And it’s not just about confusing the two; it’s also about knowing which type of worker will suit your business and fit well with your existing team.

Obligations to employees versus contractors.

Quite aside from the costs of recruitment, induction and training employees, are the ongoing commitments of paying them the correct wage and entitlements (including penalty rates, sick pay, annual leave and long service leave). A significant part of paying wages is that the employer is responsible for paying their employees tax each quarter as part of their Business Activity Statement (BAS). These amounts can quickly accrue, and employers need to organise their accounts to ensure these funds are set aside each pay period.

This compares starkly with the much leaner obligations to a contractor. Generally speaking, a true contractor will only require that you pay their invoice on time and keep them safe while on your premises. They will:

  • Manage their own tax.
  • Pay their own superannuation.
  • Agree with you on a rate and method of payment, and issue you an invoice.

Looking at it from this perspective makes you wonder why anyone would consider hiring employees over contractors, but costs and obligations are not the only consideration. Not every business has the same types of work to offer or roles to fill, so think about what you need and consider some of these differences.

Benefits of employees.

In a nutshell, employers generally maintain more control over employees than they do over contractors:

  • Employers set the essential requirements like how, when and where an employee will work.
  • There are good prospects for long tenure if staff are kept suitably motivated through advancement, career planning, goals and rewards.
  • Associated costs are regular and relatively anticipated.
  • Employees might be seen as more invested in their work because unlike a contractor arrangement; they don’t work for anyone else.
  • Most importantly (in my opinion), they reflect the culture of ‘your’ workplace. Their ongoing training will cover the things you want present in your business and conveyed to your clients. If your brand is important to you, then well-trained employees are key to maintaining consistency and building your brand.
  • A well-trained employee is an asset to your business.

Benefits of contractors.

Contractors are independent of your business, and depending on the industry they will generally work for a number of clients:

  • Even though contractors might invoice at a slightly higher rate, the time saved on the administrative side of managing employees is usually a fair offset.
  • Contractors take care of their own insurance.
  • They provide their own uniform and tools (where applicable).
  • You only pay for work completed and don’t have to budget for sick leave and holidays.
  • If your work is sporadic or seasonal, it also means you need only pay for contractors when the work is actually available.

On the flip-side:

  • Contractors often set their own work hours and apply their own standards to presentation and communication.

Now, of course, you can enter agreements with contractors to firm up some of these less manageable aspects, but this is where things get a little tricky. In the words of Fair Work Commission Deputy President Gostencnik, “That which has webbed feet, waddles and quacks is likely to be a duck. Putting a saddle on it and calling it Phar Lap will not change that fact.”

If the agreement you make with your contractor has the effect of making them an employee, you may find yourself liable for a list of entitlements they might claim down the track.

Remember that many amicable agreements don’t end that way in business, so if you want to engage a contractor under an agreement that gives you more control (even if they’re ‘OK’ with it), get legal advice first and don’t risk ‘saddling up a duck.’

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