Contractor vs Employee

August 24th, 2013

Employee contractor


 Contractor vs employee

Is your worker classed as an employee or contractor by the ATO?

This year the ATO will be investigating 950 employers to make sure they are not avoiding their tax and super obligations by incorrectly treating workers as contractors rather than employees.

So how do you make sure you’re getting it right?  Lets look at the contractor vs employee:


A worker will have the characteristics of a contractor if:

  • The worker is free to sub-contract or delegate the work they perform to someone else.
  • All tools and equipment required to do the job is provided by the worker.
  • The worker is legally responsible for their work and liable for the cost of rectifying any defect in their work.
  • The worker has freedom in the way the work is done.
  • The worker is operating their own business independently from your business and performs work for other businesses besides yours.
  • The worker is paid for a result achieved based on a quote they provided rather than an hourly amount.


A worker will have the characteristics of an employee if:

  • The worker cannot pay or subcontract someone else to do the work that they are supposed to perform.
  • The worker is paid by the hour for work performed.
  • Your business provides all or most of the tools and equipment required to perform the work.
  • Your business is legally responsible for all of the work performed by your worker.
  • Your business has the right to direct the way in which the worker performs the work.
  • The worker only works for your business and no one else.

My Final Word

Still thinking about turning a blind eye to your contractor that could potentially be classed as an employee by the ATO?  Getting this wrong can be costly enough to close down your business.  By treating your worker as a contractor you avoid sick leave, annual leave, long service leave, superannuation and workcover.  These expenses can add up to hundreds and thousands of dollars, not to mention the fines and penalties that will be applied should you be found guilty of getting it wrong.  A recent court case (ACE Insurance Limited V Trifunovski [2013] FCAFC 3) found 5 insurance sales representatives to be employees rather than contractors.  The employer was order to pay in the range of around $500,000 in annual leave, long service leave and sick leave that would have been payable had the company treated the workers as employees rather than contractors. 

Make sure that if you’re thinking about hiring a full time contractor under an ABN arrangement, you get some advice not only from your accountant, but also your lawyer.

My recommendations

I can’t rave enough about the employee/contractor calculator on the Tax Office website.  Of the many downloadable tools on their website this would have to be one of the best.  It is clear, concise and easy to understand.  It certainly is a great free starting point to give you an idea of whether or not you may have a problem.

For some heavier reading on the difference between an employee and a contractor I suggest TR 2005/16

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