Spot the Difference! Employee or Contractor?

Employing staff is a major step for many small businesses, and in order to “test the waters”, some prefer to hire on a contract basis rather than a wage basis. Others use the contracting system for casual, seasonal and trade workers. This is not illegal, however there are traps for the unwary.

The ATO have several issues with this situation as these arrangements can sometimes mean that the contractor is not being paid fairly, and as a result will not have access to work cover or superannuation and other employee benefits such as leave entitlements.

For a contractor to be considered bona fide, there must be a commercial relationship. This refers to the contractor having control over the work they do, being able to engage assistance or send someone else in their place to do the job, as well as being paid commercial rates for compensation which are not necessarily linked to an hourly rate.

Where any of the above situations are absent, then it is more likely that you have an employer/employee relationship. That is, such situations where the person uses your equipment, gets paid on an hourly rate for no specific outcome, works during hours specified by you, and doesn’t have the option of sending a replacement to do the job if they are not available.

Many presume by obtaining the contractor’s ABN is it assumed that the arrangement will be satisfactory under current tax laws.

Spotting the difference between an employee and a contractor doing the same work becomes an important exercise to keep the employer on the right side of the law.

It is important when assessing these situations, as severe penalties apply where a contracting relationship is proven not to exist.

There is a management tool available on the ATO website at

If you’re unsure of your situation, please call us for assistance.

Jo-Anne Chaplin

Jo-Anne Chaplin, owner and director of Tax and Superannuation Professionals. Jo-Anne provides professional accounting services with a friendly, personal touch. You’ll find that she is approachable and easy to work with. Jo-Anne loves helping people create wealth for themselves and their families.


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