ATO, tax office, contractors, employee

We often get asked by small businesses how they should classify workers in their business. Are workers considered as employees or contractors? The question often includes something around the worker having an ABN so they must be a contractor! Unfortunately, whether a worker has an ABN or not has little bearing on the actual employee vs contractor decision.

This blog post is an extension of an article we wrote for Shoestring in November 2013 and we have included some helpful and more detailed tips about how to navigate your way through this issue and ensure that you are meeting your responsibilities as a small business owner.

So what is the difference between and employee and a contractor:

Employee: an employee is someone who works in your business and is a part of the business.
Contractor: A contractor is someone who is running their own business

The ATO has set out some guidelines that small businesses should follow when making this assessment and these are broken down in 6 key steps in the following table:



Ability to sub-contract /delegate: An employee cannot sub-contract or delegate work by paying someone else to do this work. A contractor is free to sub-contract/delegate work to someone outside of the organisation
Basis of payment: Employees are generally paid on the following basis; a) for the time worked b) a price per item or activity or c) a commission. A contractor is paid for a result achieved based on the quote they provided.
Equipment, tools and other assets: An employee works for a business that provides all or most of the equipment, tools and other assets required to complete the work or is given an allowance or reimbursed if they provide their own equipment etc Contractors bring all or most of the equipment, tools and other assets to the job and do not receive a specific allowance or reimbursement for their cost
Commercial risks: An employee accepts no risk associated with the businesses operations as this is carried by the business itself. This includes defective products etc A contractor would take on all business risk including being legally responsible and liable for their product along with rectifying a defect in their work.
Control over the work: Employees are managed by the business including being directed on how to perform their work Contractors are free to operate the business according to their wishes as long as they meet contractual terms
Independence: Employees work within and are considered part of your business and cannot be viewed as independent Contractors operate their own business independently per the contract and can choose to accept or refuse additional work.

Remember to use these 6 steps when looking to hire a new worker so you remain within ATO guidelines on this issue.