When it comes to getting business requirements fulfilled, the organizations either hire an employee or a contractor. Both of them may be paid equally for the same work, but there are certain legal differences that you need to keep in mind. This distinction is important both from a business owner as well as workers point of view as it decides the payment and tax terms.

We gathered the below difference after consulting several Employment Lawyers in Sydney. The laws may differ as per your state, and so will these differences. So it’s wise to get legal advice instead of relying on these sources completely.

What does the two mean?

The basic difference can be seen by the fact that an employee works in your while the contractor is usually running their own business. Despite the differences, the exact definition of an independent contractor’s roles and responsibilities aren’t concrete. It’s advisable to have a clear agreement prior to the beginning of the work.

Ability To Delegate Work:

While an employee is bound to complete the task assigned by himself, a contractor is free to sublet the work further.

Payment Structure:

A common law employee is paid either on a monthly basis or for the time worked. He may even get commission and incentives as per the criteria. On the other hand, a contractor is paid based on the quotation provided and against the result achieved. Although the quotation is fixed prior to the commencement of the work, there may be amendments in the same upon the mutual agreement of the two.

Freedom To Work On Your Wish:

As an employee, you are bound to work within the organization’s guidelines. You might enjoy some degree of freedom in your work, but you need proper approvals for your actions. On the contrary, a contractor will work independently for your organization with subject to contract terms and may accept or refuse any extra work besides the agreement.

Requisites For The Work:

In the case of an employee, the organization fulfills the need of any assets, tools and any other requirements to complete the work. If any other essential are required from the employee side, they are reimbursed by the company.

On the other hand, a contractor is liable to get all the required tools and assets to complete the work. The company does not provide any reimbursement for the same.

Commercial Risks:

The employee you hired for you is free from any risks involved with your business. But working as a contractor involves certain commercial risks. You may or may not be amenable for any defects caused, depending on the agreement terms.

Varied Tax And Super Obligations:

Depending on whether you hired someone as an employee or a contractor, your taxes and other legal obligations varies accordingly. As a business owner, if you hired an employee, you’ll need to detain tax from their wages and report and pay those amounts to the government.

If you hired a contractor, they would usually look after their own tax obligations. There may be certain scenarios where you may have to pay super for individual contractors, such as if the contract is mainly for their labor.

Also, read how to lodge a grievance at work.

How Does The Court Differentiate Between The Two?

Besides the Fair Labor Standards Act, there are certain guidelines that the common law rules that help to make the conclusion.

  • Behavioral Rules
  • Financial Rules
  • Type Of Relationship

As a business, you should consider the gravity of these factors when deciding whether your worker qualifies as a contractor or an employee. This may be a little bit complex, so we recommend consulting an employment lawyer to get a better insight.

Can Employees Be Treated As Contractors?

It is illegal to treat your employees as a contractor. There are high penalties and charges against businesses found guilty of this. These businesses reduce their taxes and other government obligations by lowering labor costs.

In case you been found guilty for the same, and have some reasonable argument for treating your worker as a contractor, you may consider looking for relief provisions.

On the other hand, as an employee, you need to be aware of such malpractices. If you come across any such case, you can report to authorities and remain anonymous.


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