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Employee Or Contractor: How To Determine The Difference

Contracting has recently emerged as an alternative working relationship along with other types of non-traditional employment such as labour hire.

Many businesses use contracting-out arrangements to improve efficiency and allow the business to focus on core activities. Services can often be provided by an outsourcer cheaper than if the firm uses its own employees to do the work.

Small business employers need to recognise who are employees and who are contractors, as their obligations depend on the nature of the relationship.

Employee or contractor?

The individual circumstances of a working relationship are important in determining whether you are an independent contractor or employee.

Use the Contractor decision tool to see whether the courts are likely to consider you an independent contractor under common

independent contractor or employee


Generally, you are an independent contractor if you:

  • are paid for results achieved
  • provide all or most of the necessary materials and equipment to complete the work
  • are free to delegate work to others
  • have freedom in the way you work
  • provide services to other businesses
  • are free to accept or refuse work
  • are in a position to make a profit or loss

The main factor that will help determine whether a person is an employee or a contractor is the extent of the control over the work that the employer has.

If the employer has the right to control when, how and by whom the work is done the relationship is usually that of an employee. Whether the employer exercises this control or not is irrelevant.

Legitimate Contracting

Legitimate contracting will continue to grow, with more outsourcing becoming the norm. To cover a spike of business coming in the door, many employers look to taking on contracted workers – thinking that when the spate of extra work is over and done with, they can be taken off the books.

This is a sensible way to cover a temporary shortfall in staff, and done properly can serve the workplace, and the workers, well.

But if you engage a worker just for their labour rather than for a specified outcome (for example), they are likely to be considered an employee rather than a contractor under the relevant laws.

In a sales role for example, even someone working for commission and not receiving a fixed remuneration will usually be deemed to be an employee.

Many an employer has been caught out when they find that the workers they hired as short-term contractors are in fact deemed to be employees, who are entitled to all the usual obligations.

More information…

  • Visit the Contracting essentials page on the Australian Taxation Office (ATO) website or phone the ATO on 13 28 66.
  • See Independent contractors from the Department of Industry, Innovation, Science, Research & Tertiary Education.
  • Contact the Independent Contractors Hotline on 1300 667 850 or at independent.contractors@innovation.gov.au
Contact Us

AIMS Accounting Service
22 Swindon Close
Lake Haven NSW 2263
Phone: 02 4392 8720

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