Independent Contractor or Employee?
Recently we’ve had the pleasure to work on some longer term projects for clients and for one of these projects the question was raised, ‘Is this consultant an Independent Consultant or Employee”?
First and foremost, if you are unsure find out all that you need to before commencing any engagement as there are substantial penalties imposed by the Australian Tax Office (ATO) if you report incorrectly.
In my research I came across a simple checklist published by CPA Australia that provides an easy reference point.
So what is an independent contractor?
By definition of the ATO an independent contractor is an entity (such as an individual, partnership, trust or company) that agrees to produce a designated result for an agreed price. In most cases an independent contractor:
- is paid for results achieved
- provides all or most of the necessary materials and equipment to complete the work
- is free to delegate work to other entities
- has freedom in the way the work is done
- provides services to the general public and other businesses
- is free to accept or refuse work, and
- is in a position to make a profit or loss.
Therefore generally an individual is considered to be an employee by ATO definition if they:
- are paid for time worked
- receive paid leave (for example, sick, annual or recreation, or long service leave)
- are not responsible for providing the materials or equipment required to do their job
- must perform the duties of their position
- agree to provide their personal services
- work hours set by an agreement or award
- are recognised as part and parcel of the payer’s business, and
- do not take commercial risks and cannot make a profit or loss from the work performed
ATO’s Free Decision Tool
ATO features a free decision tool on their website to help you decide whether you are dealing with an independent contractor or an employee. It might be just what you need to help you make the clear distinction between the two. As a result it should leave you with a clearer idea on whether you are engaging an Independent Contractor or an Employee – provided you answer the questions correctly.
I’m interested to hear if you have experienced this situation either as a business seeking to appoint a person or as the consultant / contractor.
