Contractors and Employees

If someone is engaged on a “labour only”

contract and are paid to deliver a service rather than a result, then that person, who may be called a contractor, will be regarded by the law generally, and the ATO particularly, as an employee.

As such that person will be entitled to the provision of superannuation contributions, and to be covered by Work Cover Insurance.

“Labour only” generally means that more than 50% of the fee can be attributed to the provision of labour.

The ATO website has a flowchart that can be used as a decision tree to identify contractors from employees, but the main distinguishing features are that a contractor (as opposed to an “employee”) may have:

  • considerable capital equipment (audio visual equipment, musical instruments, and computers),
  • their own employees,
  • the ability to subcontract all or part or the work to third parties,
  • the feature of delivering a result, rather than the service that gives rise to the result,
  • their own premises, from where they work,
  • an obligation to make good any defects in their work.

The danger is regarding someone as a contractor when they are, in fact, an “employee” is that the employer may be required to back pay superannuation (with costs, and is not tax deductible), and may be personally liable for any costs associated with work related injuries that would otherwise have been covered by Work Cover. For the “contractor” the danger is that they will be claiming tax deductions for, say, their car, when the car is used substantially to travel to and from the “employers” premises, and which is not tax deductible.

See also Personal Services Income