Are you an employee or a contractor


By Anand Shukla

Entity’s that incorrectly classify employees as contractors working with an ABN have the potential to incur significant penalties. To mitigate these risks, it’s crucial that an entity accurately establish whether an individual is an employee or contractor to correctly meet their tax and superannuation obligations.

The nature of an employee opposed to a contractor working with an ABN lies within the working arrangements between the entity and the individual. Contractual arrangements stipulate the terms and conditions of the working arrangements to be carried out during the course of employment. Hence, the primary characteristic distinguishing an employee from a contractor is that a contractor works for their own business, while an employee is a member of a larger entity. It is logical to assume a contractor would need an ABN in order to work for their own business; however, alternative factors are assessed by the ATO to distinguish the true nature of employment undertaken. The ATO outlines the following factors:

The ability to subcontract/ delegate work
An employee will not be able to allocate or pay another to carry out their work. A contractor has the ability to do this.

Basis of remuneration
An employee is paid an hourly wage or annual salary, with the entitlement to other pro-rata employee benefits (sick leave, annual leave, long service leave) as stipulated by legislation in conjunction with a contract of employment. A contractor’s remuneration is aligned with the quote they provided.

Equipment, tools and other assets
An employee is generally provided with equipment, tools and other assets to complete their occupation (or reimbursed for the costs) while a contractor must supply their own.

Commercial Risks
An entity carries all the associated commercial risks of the work carried out by the employee. A contractor is legally liable for their work they perform and any extra associated risks.

Control over work
An employee cannot delegate or determine the strategy undertaken by the employer for who one works. This power remains with management or those in charge of governance. A contractor can freely determine the way in which work is carried out, as long as it aligns with existing contractual arrangements.

An employee’s actions are dependent on the entity’s strategic direction. A contractor is able to act independently to accept or reject work at their own discretion.

It is crucial to distinguish between the nature of employment undertaken by an employee and a contractor to ensure your annual tax and superannuation obligations are fulfilled. If you are unsure about your personal employment circumstances or whether you have an employee or a contractor, it is advisable to seek independent advice.

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