April 26, 2017

Tips for choosing between employees and contractors

Updated: 6 December 2019

If you are stuck deciding between employees or contractors, it’s helpful to understand the difference so you can classify correctly, avoid legal headaches and focus on growing your business.

1. Key differences  between employees and contractors

Here are the key features of employee and contractors to help you understand the difference.





Employer deducts tax from pay

Contractor pays tax


Employer pays

Contractor pays

Tools & Equipment

Employer supplies

Contractor supplies

Tools &

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

Pay rate

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

Intellectual Property

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.

2. What to consider when choosing either an employee or contractor

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

Specialised work

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

Project work

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

3. Sham contracting

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:

  • misrepresenting employment as an independent contracting arrangement when it should be an employment arrangement; or
  • dismissing an employee then re-hiring them as an independent contractor; or
  • making false statements made to persuade someone to work as an independent contractor instead of an employee.

At the time of writing, 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 minimise disputes. 

Leave your questions and comments below. 

I wish you every success in your ventures!

About the author 

Vivian Michael

As founder and lawyer at Michael Law Group, Vivian advises Australia's top entrepreneurs on business and employment matters. Clients benefit from Vivian's commercially focussed and pragmatic legal advice, business experience, and commitment to deliver the best quality business legal services to her clients.

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