Are they an Employee or a Contractor – 5 Questions to Ask Yourself

Small business and fast growing entrepreneurial organisations who are looking to service more clients and bigger projects faster and more efficiently have always been creative in how to manage this growth in their organisations.

One of the key strategies many small business use to facilitate growth in a low risk, cost effective way, is engaging contractors rather than employees to help meet their growing client demands. And there are lots of great arguments for why businesses should utilise this option.

However, with the prevalence of contract labour available, and the fact that this now seems to have become ‘common practice’ amongst small businesses, the line between what constitutes and employee and a contractor has become blurred in the eyes of many business owners. And those who don’t understand this are finding themselves caught in costly and potentially business destroying legal battles, purely because the right structure has not been put in place at the outset.

Contractors are a fantastic way for business to boost their skills, service more clients or offer unique service provision options, but before engaging a contactor you must understand what constitutes a contractor in the eyes of both employment and taxation law – just calling them a contractor and, paying them an hourly rate does not automatically mean they are a contractor.

Here are some of the key ways to differentiate between whether your new resource is in fact a contractor or should be an employee. Here are 5 questions to ask yourself to help you determine if they are in fact an employee or a genuine contractor:

• Who controls the work? If you want to control how, when, where and how the work is to be done, it’s most likely that you should be classifying this person as an employee not a contractor.
• Can they outsource some or all of the work to others? If you are expecting the work to be completed by that individual, and they do not have the ability to outsource to a third party, they are most likely an employee not a contractor. If you are handing them a project, with a set of end objectives in place, and a set timeframe, but how they get there (including outsourcing to other providers if they choose), is entirely up to them, then it’s likely to be a contractor arrangement.
• Are they charging for hours or an outcome? Generally speaking if you are paying them per hour of work, rather than for a specific outcome, they may be an employee and not a contractor. This isn’t always 100% clean and easy to determine, some contractors are paid for the hours worked, but it’s a very slippery slope to employee status when this is the case.
• Who accepts the risk? If your business is accepting the commercial risk for the work performed by the individual, then they are most likely an employee and not a contractor. Contractors should be accepting the risk and liability for the work they complete, and have insurances in place to protect them for this.
• Who is supplying the equipment and others tools of the trade? If you are supplying the equipment and tools of the trade, then they are more likely an employee. Contractors typically are responsible for their own equipment and resources, although there are in some cases exceptions to this.

Of course no situation is ever cut and dry when considering these issues. The reason it’s important to gain clarty at the outset though is that potentially, if you are considering someone a contractor, but they are found to be deemed an employee, you and your business could be liable to back pay employee related benefits such as superannuation, provide workers compensation insurance and appropriate coverage, and be liable for claims under the Fair Work Act.

So before assuming engaging a contractor is the simplest way forward, consider the work you are looking to have performed, and how you as the business owner plan on managing this process, and ensure the structure you put in place is correct from the outset. This will protect you, your business, and ultimately the individual you are engaging as well.

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