• Information technology example

    This example shows the differences between an employee and contractor in the information technology industry.

    Ahn is an employee

    Sara is a contractor

    A software engineer, Ahn, works for a large business. He designs, develops, tests and installs software programs.

    A software engineer, Sara, enters into a contract with a retail business to design, develop, test and install a new software program.

    Control over the work
    The business allocates work to Ahn and tells him the completion due date.

    Ahn must complete the work according to the business's established protocols, guidelines and quality standards.

    Employee characteristic – the business has control over the work.

    Control over the work
    The contract stipulates the new software program needs to:

    • be operational within six months (specific stages of the project need to be completed by set dates)
    • meet the retail business's requirements and specifications.

    Sara is able to determine how the work is completed.

    Contractor characteristic – Sara has freedom in the way the work is done, subject to the specific terms in the contract.

    Ability to subcontract/delegate
    Ahn is required to complete tasks as assigned to him by the business. If Ahn is running late in meeting a project deadline, he may be able to assign aspects of his work to other software engineers who work for the business, depending on their workloads. The business pays the other software engineers.

    Employee characteristic – Ahn cannot subcontract/delegate the work.

    Ability to subcontract/delegate
    The contract does not stipulate Sara must personally complete the work (the contract focuses on achieving a specific result, ie the software program). Sara can pay someone else to complete the work.

    Contractor characteristic – Sara can subcontract/delegate the work.

    Basis of payment
    As Ahn has recently completed his degree, the business has agreed to pay him a higher annual salary. They pay Ahn fortnightly for the agreed standard hours he works plus any agreed overtime.

    Employee characteristic – Ahn is paid for the time worked.

    Basis of payment
    Sara quoted a price to design, develop, test and install the new software program. Sara will be paid progress payments upon specific stages of the project being satisfactorily completed.

    Contractor characteristic – Sara is paid for a specific result based on the quote she provided.

    Equipment, tools and other assets
    Ahn uses the computer equipment and software provided by the business. On occasion, as agreed with the business, Ahn will work from home using his laptop to write the end-user documentation and operational procedures.

    Employee characteristic – the business provides the majority of the equipment and assets required to complete the work.

    Equipment, tools and other assets
    Sara uses her own computer equipment and software. At designated stages of the project, Sara will use the retail business's computers for short periods of time.

    Contractor characteristic – Sara provides the majority of the equipment and assets required to complete the work.

    Commercial risks
    If there are faults in the work, or it is not completed on time, Ahn is not personally liable. The business would need to pay for rectification.

    Employee characteristic – Ahn takes no commercial risks.

    Commercial risks
    If the software program does not meet the retail business's agreed requirements or does not perform to specification, Sara will be required to correct the problem at her own expense.

    Contractor characteristic – Sara takes commercial risks.

    Independence
    Ahn works on an ongoing basis for the business and must do any work reasonably asked of him within his duty statement.

    Employee characteristic – Ahn is not operating independently of the business.

    Independence
    Sara has her own website which promotes her services. She has another project to do after the contract with the retail business is completed and can choose whether she undertakes future projects for the retail business.

    Contractor characteristic – Sara is operating independently of the retail business.

    See also:

    Last modified: 22 Feb 2016QC 33180