Contractors vs employees: how to know the difference

Sam McKeith

Launching a startup is fraught with legal pitfalls, especially as the business expands and you consider engaging staff.

One big issue highlighted in recent media reports has been firms that wrongly class workers as contractors, instead of as employees.

While some SMEs are undoubtedly seeking a cost advantage in doing this, other startups and small firms are said to use contractors over employees innocently, unaware of the dire legal consequences.

“The line between independent contractor and employee can be blurry."

Andrew Jewell, principal lawyer at Melbourne firm McDonald Murholme tells us how to make sure you stay on the right side of the law when it comes to contractors versus employees.

“The line between independent contractor and employee can be blurry and accordingly businesses who engage contractors need to remain vigilant. In essence, the Court has to determine whether the individual is operating their own business or actually an employee,” he says.

Do your homework

While not exhaustive, Jewell says there are a number of factors that help define whether a worker is a contractor or an employee.

He says SMEs wanting to hire contractors should keep in mind that the term of the engagement should be for a finite period, sub-contracting should be allowed, and payment should be for success, rather than for hours worked.

“If the above is not possible then the business is likely engaging in employment rather than independent contracting,” Jewell warns.

“In this circumstance, a casual or short-term employment relationship may have the same effect but less risk for the business.”

Don’t get lazy

Jewell says the biggest mistake firms make is to keep contractors on for lengthy periods of time during which they become employees as their work conditions alter.

He says the risk here is “allowing the relationship to extend without revising the terms of the arrangement”.

“It will probably cause less issues to simply engage an individual as an employee."

“At some stage, the independent contractor becomes and employee and the business is exposed,” he says, adding that it can also be a mistake to assume it’s cheaper to engage a contractor instead of hiring an employee.

“It will probably cause less issues to simply engage an individual as an employee and deal with the employment issues as they arise,” he notes.

Jewell says with significant penalties in play, it pays for companies to ensure they’re towing the line.

“Aside from the actual penalty for each breach of the Fair Work Act, up to $54,000, employers can be required to pay superannuation and leave entitlements to individuals who engaged as contractors. In cases of long term engagements these liabilities and run into the hundreds of thousands,” he says.

Sam McKeith

Sam McKeith is Sydney-based media professional. He has contributed to many leading publications including The Huffington Post, The Australian Financial Review, The Australian and BRW Magazine. He was previously a senior reporter at the Australian Associated Press where he covered national affairs. 

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