Ever been confused about the differences between an employee and a contractor? You’re not alone.
An employee is someone who works in your business and is part of your business. A contractor is someone who runs their own business.
According to the law, contractors have different rights and obligations to employees. This is because contractors provide services to another person or business, instead of being employed by that person or business. Therefore, it’s important to understand the differences between the two.
How do you determine whether a worker is an employee or a contractor?
The employment status of a worker is a question of fact (and not unilateral nomination). In other words, it does not matter from a legal viewpoint whether an individual is called an independent contractor or an employee.
Factors that the courts take into account when examining a relationship between parties and determining whether a contractor or employment relationship exist are set out below. It is important to keep in mind that no one factor will be determinative.
- Ability to subcontract/delegate.
- Basis of payment.
- Equipment, tools and other assets.
- Commercial risks.
- Control over the work.
Each factor will be discussed separately below.
- Ability to subcontract/delegate
An employee can’t subcontract/delegate the work – they can’t pay someone else to do the work.
A contractor can subcontract/delegate the work – they can pay someone else to do the work.
- Basis of payment
An employee is paid a salary or wage for the time worked by them for the employer.
A contractor is paid for a result achieved on the basis of 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
For an employee, the employer provides all or most of the equipment, tools or other assets required to complete the work. Alternatively, the employee 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.
A contractor provides all or most of the equipment, tools and other assets required to complete the work. The contractor does not receive an allowance or reimbursement for the cost of this equipment, tools and other assets.
- Commercial risks
An employee takes no commercial risks. Your employer is legally responsible for the work carried out by the employee and liable for the cost of rectifying any defect in the work.
A contractor takes commercial risks and is legally responsible for their work and liable for the cost of rectifying any defect in their work.
- Control over the work
For an employee, your employer has the right to direct the way in which he/she does their work.
A contractor has freedom in the way the work is done, subject to the specific terms in any contract or agreement.
An employee is not operating independently of your business. An employee works within and is considered part of your business.
A contractor is operating their own business independently of your business. A contractor performs services as specified in their contract or agreement and is free to accept or decline additional work.
In summary, an employee and a contractor have important differences at law. As explained above, whether someone is an employee or a contractor, is a multi-factor test. If you are not sure whether you or the person you are dealing with is an employee or a contractor, you should obtain legal advice.
To speak to a lawyer about these issues, call Vault Legal today on 1300 002 212 or email us at email@example.com.
Key words: employer, employee and independent contractor.