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Video transcript - Paying workers – Is your worker an employee or contractor?
When you’re in business you may hire employees as your business grows. You may also have contractors undertaking work for your business. It’s important to understand the difference between an employee and a contractor. You have different tax and super obligations for employees and contractors. A contractor is a business in their own right. A contractor is not part of your business.
Having an ABN (Australian business number) does not necessarily make a worker a contractor and you should not be asking your workers to apply for an ABN unless you’re sure that they are running their own business.
If you have employees, you need to know about pay as you go withholding, superannuation and fringe benefits tax. If you engage contractors, they must meet their own tax obligations, although you may have some obligations in some circumstances.
It’s important to understand the difference between an employee and a contractor. To determine whether a worker is an employee or a contractor, you need to consider the whole working arrangement and look at the specific terms and conditions under which the work is performed.
Let’s look at an example. Mary employs Clara as a waitress. Clara works in Mary’s business and is part of her business. She is required to be at the cafe from 8.00am-4.00pm, Monday to Friday. Each day Mary instructs her about what work she will carry out that day. Mary, or the cafe business has control over the work.
Clara has been hired by the business to do hospitality work and needs to personally perform the work requested of her. She cannot sub-contract or delegate the work. Clara is paid an hourly rate for the time she works each week. She uses the cafe's equipment, stock and provisions. If Clara does a poor job and her performance does not meet the required standards, the cafe is responsible for the service provided. She takes no commercial risks. Clara works for the cafe and must complete any waitressing work Mary may request. She is not operating independently from the cafe and as such, Clara is an employee.
Now let’s look at an example of a contractor.
A landscape gardener and designer, Jason, has been engaged by a local retirement village to landscape some of their home units. Based on their agreement, Jason is responsible for preparing the soil and planting bushes for the specified home units the retirement village has requested. The retirement village requires Jason to complete the work during 5 April to 4 May (during specific hours), but he can choose how the work is undertaken. He has freedom in the way the work is done, subject to the specific terms in the agreement.
Jason doesn’t need to personally complete the work himself. He employs an apprentice who will help in completing the work on the retirement village and he pays the apprentice weekly for the hours he works. Jason can sub-contract or delegate the work.
He will be paid the amount he quoted to landscape the home units once the work is completed to the required standards and time frame. Jason is paid for a specific result based on the quote he provided. As specified in the agreement, Jason provides the tools, equipment and materials required to complete the job. If the standard of work does not meet the required standards, Jason will need to rectify the poor workmanship at his own cost. Jason does take commercial risks.
Jason regularly advertises his services and has several landscaping jobs booked in after the work at the retirement village is completed. If the retirement village needs further work done, he has the choice about whether he completes the work (depending on what other jobs are booked at the time). Jason is operating his own business independently from the retirement village. He is not an employee of the retirement village.
For more information about the difference between an employee and a contractor, you can go to ato.gov.au/EmployeeContractorEssentials’
Or to use the employee/contractor decision tool, go to ato.gov.au/EmployeeContractor You can use the tool to get an answer you can rely on about whether your worker is an employee or a contractor. It is free, anonymous and easy to use. You can print a copy of the result and keep it for your records.
This video will help you determine whether a worker is an employee or a contractor.