What does a business need to consider when engaging an employee versus a contractor?

When it comes to deciding whether to engage an employee or a contractor, business owners should carefully consider the implications of each decision.

In this article, we explain some of the pros and cons of engaging an employee versus a contractor, and outline some of the tax considerations.

Engaging an employee

Pros

Hiring an employee gives you greater control over how, when and where the work is completed, as the individual works exclusively for you.

What’s more, when you take on an employee, you know they are actually doing the work.

A contractor, on the other hand, may delegate some of the tasks to another party.

Having an employment contract also gives you more certainty as to exactly the type of work to be provided, and you can budget and anticipate the costs involved moving forward.

Cons

When you engage an employee, expenses such as annual leave, long service leave, sick leave and superannuation come out of your pocket.

If the employee needs certain tools or equipment to perform their duties, you will likely have to supply them or reimburse them for the cost.

Furthermore, the onus is on you to make sure the work is up to scratch, whereas contractors have to fix any errors at their own cost and effort.

Depending on the industry, there is also the application of the various fair work and award structures to consider.

Engaging a contractor

Pros

If you require a specialist skill within your business, contracting may be the way to go.

The flexibility of the arrangement and the ability to customise the service and how it’s provided can also be appealing to business owners.

From a financial point of view, contracting can be more cost-effective than engaging an employee, as you don’t have to worry about paying for things like superannuation, annual leave and sick leave.

Moreover, contractors usually supply their own tools and equipment and you won’t have to reimburse them for expenses.

Cons

As mentioned earlier, business owners have less control over how, when and where the work is completed when they hire a contractor.

If the contractor has multiple clients, you may not get the work delivered as quickly as if they were your own employee.

The contractor may also delegate certain tasks to other parties (you can stipulate otherwise).

This kind of arrangement is more open-ended, so you need to be crystal clear about what’s expected and document it accordingly.

Key considerations

If you do decide to engage a contractor, it’s extremely important to record the terms of the engagement in a written contract before the work begins.

It’s a good idea to have the document drafted by a solicitor as, in some cases, a court may decide the individual is an employee, rather than a contractor.

If you’re unsure about whether you’re engaging an employee or a contractor, you can use the Australian Taxation Office’s employee or contractor decision tool to check.

If you hire an employee, you’ll have to withhold tax on payments under the PAYG system, and if they’re a contractor, they must provide you with an ABN. You should also check whether they charge GST.

Even if you engage a contractor who uses an ABN and signs a contract saying they are not an employee, they may still be deemed an employee under the law. In other words, you may still have to pay superannuation on their behalf. At LDB, we can provide clarification.

You may also have to take out workers’ compensation insurance for contractors you hire, depending on your state or territory.

Need advice on hiring employees or contractors?

To find out how we can assist you, please get in touch by calling (03) 9875 2900 or sending us details via the contact form below.