Here are some tips to help you classify your employees and contractors correctly.
If you are stuck deciding between employees or contractors for your startup, it’s helpful to understand the difference so you can classify correctly, avoid legal headaches and focus your time on growing your business.
Here are the key features of employee and contractors to help you understand the difference.
Employer deducts tax from pay
Contractor pays tax
Tools & Equipment
Employees are entitled to leave
Contractors are not entitled to leave
Employee’s take direction from their employer e.g. work hours, work direction
Contractors generally work autonomously, can set their own work hours and require little or no supervision to complete their work
The employer will set the pay rate for the employee, the employee may be able to negotiate higher pay
The contractor sets their own pay rate e.g. hourly, daily.
The employer provides a payslip. The employee may complete a timesheet but does not invoice the employer for their work
The contractor may also complete a timesheet, but they will invoice the employer for their services. They will have an ABN or ACN and provide this detail on the invoice
It is presumed that the employer owns IP even if it’s not mentioned in the employment contract
A contractor owns IP created unless a work agreement states otherwise.
Here are some factors that usually influence the decision to hire either an employee or contractor.
You need the worker to have a regular work pattern on an ongoing basis to run a business work process effectively e.g. 2 days per week 9 to 5 pm
Regular work pattern not required as long as work is complete
You need someone to run your existing business process(s), they simply need to follow straight forward steps and you can supervise them
The work required needs to be completed by someone that can work autonomously. You don’t want to supervise them because you may not have the capacity to
Tools & Equipment
You have all the tools and equipment required to complete the work and provide these to the employee
The contractor will supply the tools and equipment to get the job done
Your business has people with the skills to carry out your work processes effectively
Hiring a contractor with specialist skills is important because you do not have workers in-house with that skill set and you may only need that skill set for a specific project only
It’s a project and you want to rotate your employees so you can cross-train and up skill them
You know it’s for a specific time frame, you want someone that can get in, get the job done and get out because you may not have time to train your existing workers
Sham contracting is against the law.
So what exactly is sham contracting ?
If you are either knowingly or recklessly denying workers employment benefits and protections then you could be engaging in sham contracting.
Sham contracting arrangements include:
Penalties range from $6,600 for an individual to $33,000 for a body corporate.
If you have issues with your employees about their classification as contractor or employee, this can detract the focus from your business and cause morale problems with your other employees.
Regardless of your choice of employee or contractor, getting legal advice and having a good quality worker agreement drafted will set clear expectations and minimises disputes that can occur.
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