If you are thinking of growing your business and you need added resources or specialist skills and employing someone is not cost effective, then outsourcing to a Contractor could be your ideal solution.  It’s a way to access skills your business may be lacking or give you back time to work on your business.

Like any business decision you should take time to evaluate potential candidates, not only the skills of the individual but also his/her business model.  You need to ensure that the working arrangements you put in place will in fact be that of an independent contractor and satisfy the legal requirements around contracting.

There are several factors to consider when determining whether a contractor satisfies the requirements of a true contractor and is not deemed an employee.  To identify the differences please consider the following:

Method of Payment

Contractor – has an ABN and submits an invoice for work completed or is paid at the end of the contract or project.

Employee – is paid regularly on either a weekly, fortnightly or monthly basis.

Tools & Equipment

Contractor – as a rule, an independent contractor will use his/her own tools and equipment.

Employee – as the employer you will provide any tools and equipment required to perform the job.

Hours of work

Contractor – under your agreement the contractor decides what hours to work to complete the specific task.

Employee – employees will work standard or set hours to fit in with business needs.

Degree of Control

Contractor – the contractor has a high level of control in how the work is completed.

Employee – someone who performs work under the direction and control of the employer on an ongoing basis.

Expectations of work

Contractor – there is no expectation of ongoing work beyond the terms of the agreement.

Employee – has an ongoing expectation of work.

Risk

Contractor – the contractor will bear the risk of making a profit or loss on each project or task and it is his/her responsibility and liability to rectify any damages or injury sustained while performing the work.

Employee – does not incur any individual risk or liability for work completed.

Superannuation

Contractor – personal circumstances need to be considered when determining liability for superannuation payments (refer below).

Employee – employers must make superannuation guarantee contributions for all eligible employees.

One element alone won’t classify someone as a contractor.  For example, having an ABN alone does not make someone a contractor, they must satisfy most of the characteristics noted above.

Whilst a contractor should be paying his/her own superannuation contributions, the lines can become blurred if the contractor is an individual contractor and is completing all the work themselves, don’t have anyone else in their business to which work can be assigned, and if a contract is used “wholly or principally for labour”.  This means that if the contractor is:

  • paid wholly or principally for his/her personal labour and/or skills;
  • performs the work personally; and
  • are paid for hours worked, rather than to achieve a result.

If the above scenario applies to a contractor within your business, the contractor could be considered an employee for superannuation purposes and is entitled to superannuation contributions under the same rules as employees.  Payment of superannuation can be a confusing issue to work through, so we recommend that you get support from your accountant or another specialist who can advise you on any liability before engaging a contractor.  The contractors’ business model and how he/she works will need to be considered.

In closing, make sure that you have a Contractor Agreement in place that outlines all the elements mentioned above.

Whilst there can be a little work involved to set up your contractor arrangement correctly, setting strong foundations initially will result in a successful partnership for your growing business.