Contractor or employee? There’s a big difference

by Terry Edwards, Director

If your business employs workers, your legal obligations towards them vary depending on whether they are an ‘employee’ or a ‘contractor’. Getting it wrong may result in penalties for the business, so it is well worth checking the working arrangements you have in place.

If you are not meeting PAYGW, super, FBT, Payroll Tax and WorkCover obligations to your workers, your business could incur penalties.

Businesses who are employers need to ensure that appropriate and legal working arrangements are in place for their workers, based on a clear understanding of the difference between a ‘contractor’ and an ‘employee’.

Numerous myths surround the classification of a worker as either an employee or a contractor, particularly concerning your obligations as a business owner when it comes to PAYGW, super, FBT, Payroll Tax and WorkCover. In our experience, these are the two most common misunderstandings:

  1. A business can avoid paying super or Payroll tax by employing a contractor.
    This is not the case. You may still have to pay super for individual contractors if the contract is mainly for their labour, such as would be the case if you as the employer have provided any materials required for the work. Further, the wages you pay to contractors contributes to the relevant payroll tax wages threshold for your business. This means you do need to take into account the wages you pay your contractors when working out your business’s payroll tax liability.
  2. A business can employ an individual as a contractor by giving them a contract.
    This is not the case. Regardless of what is described in a ‘contract’ document, it is their actual treatment and behaviour that determines whether an individual is legally an employee or a contractor. If you refer to a worker as a contractor but they are actually treated as an employee, the ATO may identify them as an employee and your business may be penalised.

Several factors combine to determine whether a worker is legally an employee or a contractor. These include payment method; the worker’s independence; who controls the work; legal responsibility for the work; equipment and tools used; and whether or not the work may be subcontracted. It is the details within your working arrangement that determine whether an individual is an employee or a contractor. Importantly, your PAYGW, super, FBT reporting and payment and Payroll tax will vary depending on whether the worker is an employee or contractor. Seeking professional advice will help you to ensure that your business’s employment arrangements are properly in place.

The most obvious consequence of treating an employer as a contractor is that it is not legal and may attract financial penalties as the result of an audit or complaint.

If you want to avoid unwanted penalties or distractions from running your business, it’s important to manage your employment arrangements efficiently and legally to ensure you are meeting your obligations and your workers are lawfully engaged. This is an essential foundation for business success.

DLA Partners offers a range of business advisory services in addition to employment advice. Please phone (07) 3863 9444 or email


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