Employees vs Contractors: Understanding the Difference
- Chirag@XperTax
- Apr 15
- 3 min read
When engaging workers in your business, understanding whether they are employees or independent contractors is critical. The classification directly affects your tax, superannuation, and legal obligations—and getting it wrong can be costly.
What’s the Difference?
Employees work in your business and act as part of your team.
Independent contractors operate their own business and provide services to yours.
The difference is more than just labels—it’s about the working relationship and contractual terms you agree upon.
Classifying Your Worker
As an employer or principal, you are responsible for correctly classifying your workers. The classification determines your obligations for:
Pay As You Go (PAYG) withholding
Superannuation contributions
Fringe benefits tax
❗ Incorrect classification may result in penalties and liabilities.
Key Tip:
Even if someone works under the title of "contractor," the actual terms of your agreement—and how the work is performed—determine their status.
Serving In vs To Your Business
Employee | Independent Contractor | |
Nature of Work | Serves in your business | Provides services to your business |
Purpose | Works to grow your business | Works to grow their own business |
Representation | Represents your business | Represents their own |
When evaluating, focus only on the legal rights and obligations in the contract. Conduct and work practices only matter if they affect or change those rights.
Key Differences: Employee vs Contractor
Employee | Independent Contractor |
Control: Your business has the legal right to control how, where, and when the worker does their work. | Control: The worker can choose how, where, and when their work is done, subject to reasonable direction by you. |
Integration: The worker serves in your business. They are contractually required to perform work as a representative of your business. | Integration: The worker provides services to your business. The worker performs work to further their own business. |
Mode of Remuneration: The worker is paid either for the time worked, a price per item or activity, or a commission. | Mode of Remuneration: The worker is generally contracted to achieve a specific result and is paid when they have completed that result, often for a fixed fee. |
Ability to Subcontract or Delegate: There is no clause in the contract allowing the worker to delegate or subcontract their work to others. The worker must perform the work themselves and cannot pay someone else to do the work for them. | Ability to Subcontract or Delegate: There is a clause in the contract allowing the worker the right to delegate or subcontract their work to others. The clause must not be a sham and must be legally capable of exercise. |
Provision of Tools and Equipment: Your business provides all or most of the equipment, tools, and other assets required to complete the work; or the worker provides all or most of the tools, but your business provides them with an allowance or reimburses them for expenses incurred. | Provision of Tools and Equipment: The worker provides all or most of the equipment, tools, and other assets required to complete the work, and you do not give them an allowance or reimbursement for the expenses incurred. |
Risk: The worker bears little or no risk. Your business bears the commercial risk for any costs arising out of injury or defect in their work. | Risk: The worker bears the commercial risk for any costs arising out of injury or defect in their work. |
Generation of Goodwill: Your business benefits from any goodwill arising from the work of the worker. | Generation of Goodwill: The worker’s business benefits from any goodwill generated from their work, not your business. |
Superannuation for Contractors
Even independent contractors may be entitled to superannuation if:
They are paid principally for their labour
They work 30+ hours/week doing domestic tasks
They are engaged in performing arts, sport, media, or promotional services
They are paid to provide services in connection with any performance, presentation, or participation in these activities.
✅ To stay compliant, many businesses voluntarily pay super to contractors—this should be clearly stated in the contract.
Always Treated as Employees
These roles are always considered employees, regardless of contract terms:
Apprentices
Trainees
Labourers
Trades Assistants
They are usually paid under awards and require a formal training agreement. Standard tax and super obligations apply.
Hiring Individuals: Look at the Contract
Whether the agreement is:
Written
Oral
Implied by conduct
…it’s the contractual rights and obligations that determine the worker’s status.
✅ Review the entire arrangement, not just job titles or job descriptions.
Conclusion
Correctly distinguishing between employees and independent contractors is not just best practice—it’s essential for tax, legal, and financial compliance.
By reviewing:
The working arrangement
The contractual terms
And the nature of your business
…you can make informed decisions that protect both your business and your workers.
Need Help Classifying a Worker? Reach out to XperTax for expert advice on employment structures, tax compliance, and superannuation obligations.