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What is a contractor?

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what is a contractor

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Contractor management is increasingly becoming more critical for every organisation to ensure regulatory compliance and reduce risk. Thus it is crucial to understand the differences between an employee and a contractor.

What is a contractor? 

According to ato.gov.au the difference between contractors and employees is that:

“an employee works in your business and is part of your business. A contractor is running their own business”.

The table below from the ATO outlines six of the factors that, taken together, determine whether a worker is an employee or contractor for tax and super purposes. Follow the links in the table for more information about each factor.

Ability to subcontract/delegate: 

Employee 

  • the worker can’t subcontract/delegate the work – they can’t pay someone else to do the work.

Contractor 

  • the worker can subcontract/delegate the work – they can pay someone else to do the work.

Basis of payment:

Employee

the worker is paid either:

  • for the time worked
  • a price per item or activity
  • a commission.

Contractor

  • the worker is paid for a result achieved based on the quote they provided.
  • A quote can be calculated using hourly rates or price per item to work out the total cost of the work.

Equipment tools and other assets:

Employee

  • your business provides all or most of the equipment, tools and other assets required to complete the work, or
  • the worker provides all or most of the equipment, tools and other assets required to complete the work, but your business provides them with an allowance or reimburses them for the cost of the equipment, tools and other assets.

Contractor

  • the worker provides all or most of the equipment, tools and other assets required to complete the work
  • the worker does not receive an allowance or reimbursement for the cost of this equipment, tools and other assets.

Commercial risks:

Employee

  • the worker takes no commercial risks. Your business is legally responsible for the work done by the worker and liable for the cost of rectifying any defect in the work.

Contractor

  • the worker takes commercial risks, with the worker being legally responsible for their work and liable for the cost of rectifying any defect in their work.

Control over the work:

Employee

  • your business has the right to direct how the worker does their work.

Contractor

  • the worker has freedom in the way the work is done, subject to the specific terms in any contract or agreement.

Independence: 

Employee

  • the worker is not operating independently of your business. They work within and are considered part of your business.

Contractor

  • the worker is operating their own business independently of your business. The worker performs services as specified in their contract or agreement and is free to accept or refuse additional work.

Authorised by the Australian Government, Canberra. 

https://www.ato.gov.au/business/employee-or-contractor/difference-between-employees-and-contractors/

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