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Legal | 2 min read
Written by Lindy Alexander
Hiring employees versus contractors: What you need
to know
It can be tricky to understand the complexity that surrounds what
makes someone an employee and what makes them a contractor. So,
what are the key differences between the two, and what do employers
need to know?
There are many distinct elements that differentiate between an employee and a contractor,
however these differences are not always clear to employers.
What is an employee?
An employee is someone who works in an employer’s business under the direction and control
of their manager at the organisation. Employees usually work for a set number of hours per
week.
What is a contractor?
A contractor operates his or her own enterprise independently of an employer’s business and
usually work as many hours as it takes to complete a particular project.
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“Contractors may work for many businesses rather than a single ‘employer’ and have a high
level of control over how the work is done,” says Benjamin Marshall, a partner in workplace
relations and safety at law ¦rm Holding Redlich.
“Contractors will usually bear the ¦nancial risk for making a pro¦t or loss for each engagement
and generally have the ability to subcontract or delegate their work to another person. They are
also liable for defects with their work.”
Contractors also usually have a specialised skill that the employer desires for a short amount of
time (such as an electrician).
The legal differences between employees and contractors
There are signi¦cant differences that stem from the different nature of engaging either an
employee or a contractor.
Employees
“Employees have signi¦cant legal protections,” says Marshall, “including rights to paid leave, to
minimum notice of termination and various potential rights to challenge the termination of their
employment.”
However, these protections do not automatically apply to all employees at all times. Casual
employees, for example, are not usually entitled to paid leave or notice termination.
Contractors
Contractors do not have the same protections as employees. As they are usually responsible
and liable for poor performance or any injuries sustained while performing the task, they tend to
have their own insurance policy.
“It is possible that contractors receive no leave, may have their engagement terminated without
any notice period and are unable to challenge that termination,” says Marshall.
Contractors also tend to pay their own superannuation and tax, and use their own tools and
equipment.
Why employers need to know if they have employees or contractors
There can be signi¦cant legal risks associated with getting it wrong. Marshall says if employers
are in doubt as to whether an individual is an employee or a contractor, it is usually safer to
engage them as an employee. “Signi¦cant penalties and other liabilities may apply for getting it
wrong,” he says.
Myths about engaging a contractor
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“There is a common misconception that if a person’s contract says they are a contractor and
they issue invoices or hold an ABN then that automatically makes them a contractor,” says
Marshall. “This is not the case and ignores the complex factual assessment required.”
Marshall says another common misconception is that naming a corporation as the contractor
and having that corporation notionally engage the ultimate worker will avoid all potential liability
for the employer. “This is not true and there have been numerous instances where the courts
have looked past the interposition of a corporate entity and found the worker to be the
employer’s employee,” he says.
Ultimately the assessment as to whether an individual is an employee or an independent
contractor can be very di¨cult.
“If you are engaging contractors in circumstances where there is any doubt, it is important you
engage a lawyer,” Marshall says. “Every engagement must be assessed on its facts.”
Information provided in this article is general only, does not constitute legal advice and should
not be relied upon as such. SEEK provides no warranty as to its accuracy, reliability or
completeness. Before taking any course of action related to this article you should make your
own inquiries and seek independent advice (including the appropriate legal advice) on whether
it is suitable for your circumstances.
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