The importance of knowing the difference between employees and contractors
For some time now, there's been a bit of ambiguity surrounding the differences between an employee and a contractor, keeping HR employees on their toes when navigating issues between the two.
This year, the Australian Government plans to clarify this situation by defining how each position relates to the business and how they differ from one another.
Here's what to expect:
New legislations regarding employees versus contractors
Paul Dugan from DMAW Lawyers says that starting August 26th this year, there will be new rules on who is a contractor and who is an employee.
These changes form part of the Fair Work Legislation Amendment (Closing Loopholes No. 2) Bill 2023, which might make things fuzzy for employers.
Imagine a contractor five years later saying, "Hey, I reckon I was an employee all along." That could mean demands for backpay or other benefits.
But there's a bit of a workaround in this as well. If a contractor earns enough, they can give the employer an 'opt-out' notice to dodge these new rules.
Still, getting it wrong could mean big trouble, with possible court cases and hefty payouts. This makes it essential for businesses to define the role of those working for them clearly.
However, this rule hasn't come into effect yet, so as of now, let's look at who the Government considers an employee and who they consider a contractor.
What's the difference between an employee and a contractor?
As someone in HR, you're probably pretty familiar with the roles of an employee and contractor.
But just to be sure, here's a recap:
Who is an employee?
Employees are typically supervised and managed by their employers, working set hours, although casual employees may have varying schedules.
They are usually on a consistent employment basis or are called full-time or part-time employees.
These employees enjoy benefits like paid time off and sick leave and have income taxes withheld by their employer.
This level of direction and control distinguishes an employment contract, also known as a "contract of services," from an independent contractor arrangement, which is considered a "contract for services".
Who is a contractor?
Contractors, which involve independent contractors and subcontractors, operate their own businesses and sell their services to clients.
They typically use their procedures, equipment, and techniques to accomplish tasks.
Contractors often have the freedom to negotiate their rates and working conditions and may work for multiple clients simultaneously.
While they have certain workplace rights and protections, their responsibilities differ regarding insurance, taxation, and superannuation, which reflect their independent business status.
Key differences between employees and contractors
Here are a few key differences between the two:
Employees
- Formal employment contract with the employer.
- Work under the employer's direction and control.
- Receive regular wages, subject to income tax and other deductions.
- Are entitled to benefits like leave, superannuation, and redundancy pay.
- Have notice periods and redundancy pay entitlements.
- Employers are liable for their actions.
Contractors
- Can work on a contract basis to provide specific services.
- Have greater independence and control over how they work.
- Paid based on contract terms, responsible for their own taxation.
- Generally, not entitled to employee benefits.
- Usually, they don't have notice periods and redundancy pay.
- Generally accountable for their own actions and liabilities.
Common misconceptions
HR can be confusing, and misinformation is a real issue when people refer to concepts they don't know too well. For someone in HR, knowing the difference between misinformation and the truth is helpful.
Here are some common misconceptions surrounding this topic:
1. Individuals who do short-term projects are immediately considered contractors.
Just because you hire someone for a short period doesn't make them a contractor. This can be true for both employees and contractors.
The difference comes down to the terms of their work and whether they have their own business or not.
2. Hiring a person with an ABN makes them a contractor.
Once again, this isn't the case. Just because an individual has a business number doesn't mean they are essentially a contractor.
The terms of your contract with them and other aspects still need to be considered.
3. If you get an invoice for their services, they're a contractor.
Receiving an invoice from an individual for services rendered doesn't make them a contractor. They could be freelancing or providing services as a side hustle. There's still more to consider.
4. If most people in your industry are contractors, then you are too.
Don't make assumptions on these kinds of things. This will largely depend on the contract agreement between you and the client or employer.
5. They're legally an employee but have a contractor's contract agreement.
This isn't a possibility. For a legal employee, having a written contractor agreement won't matter much. Their taxes, super obligations, and benefits will hold them to their position as an employee.
Final thoughts
As someone in HR, knowing the intricacies of employee law is a must.
If you feel like you need to brush up on things like this, you can always study further by obtaining a graduate diploma in HR management or similar qualifications.
This should provide you with the latest information on legal requirements for employees and contractors in more detail, or at least give you the skills to navigate these situations easily.
