A contractor describes a person or business that enters into a contract with another person or business for work, usually at a fixed price.
Contractors are not employees of a business as they are not legally bound under an employment contract. It is therefore important to ensure you have a clear agreement in place both as an employer and as a form of contractor. The terms contractor, independent contractor and subcontractor get thrown around a lot, but have you ever wondered what each of these terms really mean?
While there are subtle differences between them, in the right circumstances, you can be both at the same time.
Independent contractors run their own business and are hired to do a set task or tasks based on certain terms within a contract. Independent contractors generally use their own processes, tools and methods to complete the work. They can delegate or subcontract some of the tasks if they need, and can work for a number of different clients at the same time.
It's important to understand the difference between an independent contractor and an employee, as this can affect things like tax obligations, insurance obligations, and leave entitlements.
Check out our Independent contractors decision tool to work out if you or your worker is an independent contractor or an employee.
A subcontractor is an independent contractor that's hired by another independent contractor to help them complete their contracted work.
Mary is looking to build a house. Mary contracts Jon to build the house for her. Jon is a general contractor. However, Jon doesn't do all of the work himself, he contracts Barry to help with laying the foundation of the house. As Barry is contracted by Jon, and not Mary, Barry is a subcontractor under Jon.
There can also be second-tier subcontractors, where an individual or business is contracted by subcontractors to do work.
Rights and responsibilities
Whether you're a general contractor or a subcontractor, your rights and responsibilities as an independent contractor remain the same. However, if you are hiring a subcontractor, you will need to fulfil any obligations you may have as a hirer (usually included within the terms of the contract).
When you agree to do a job for another person or business in exchange for money or another benefit, you are probably entering into a commercial contract. If so, this contract is legally enforceable regardless of whether it was just a handshake deal or a written agreement.
- the different types of contracts
- how to negotiate a good contract
- laws affecting contracts
- getting help to resolve disputes
- your entitlements as an independent contractor
- taxation obligations as an independent contractor.
Contractors and employees
Compared to contractors, employees have very different rights and obligations. Employees are generally:
- paid a wage
- have set hours of work
- entitled to paid holiday leave and sick leave
- entitled to superannuation.
Because employees have certain rights that contractors aren't entitled to, sometimes employers try to disguise an employee as an independent contractor, to avoid having to provide them with their entitlements. This is known as sham contracts and is illegal.
If you are an independent contractor, but you believe you should actually be an employee, check the Fair Work Ombudsman website for more information on what you can do.
It's important to note that even if you have an ABN, that doesn't automatically make you a contractor.
Five common employee or contractor myths busted!
Myth #1 - People who do short-term work are automatically a contractor.
Just because you're hiring someone for a few hours or a couple of days at a time, doesn't mean they're automatically a contractor.
Both employees and contractors can be hired for:
- casual, temporary, on call and infrequent work
- busy periods
- short jobs, specific tasks and project
Myth #2 - Workers with an ABN are always contractors.
Think that workers with ABNs are always contractors? That's not always the case!
If the working arrangement is employment, whether the worker has, or quotes, an ABN is not the deciding factor of whether or not a worker is a contractor.
Myth #3 - Because you've been invoiced for work performed it means the person is a contractor.
Just because you're invoiced for work that was provided, doesn't necessarily mean that the person is a contractor!
Receiving an invoice from a worker is not the deciding factor - as a business owner, you need to consider the whole working arrangement so you're clear on your tax and super.
Myth #4 - The majority of people in your industry are contractors, which means you workers should be too.
So you've hired a worker and assumed they'll work under a contracting arrangement because that's how workers are usually treated in you industry.
Don't just rely on how other people are doing things. Make it your business to consider the terms and conditions of each individual's working arrangement. This way, you can be clear on your tax and super responsibilities and be sure you're getting it right.
Myth #5 - It says that your worker is a contractor in a written agreement, so they must be one.
Just because it states in a written agreement that your worker is a contractor, doesn't mean that they are - nor does it protect you from potential penalties for getting it wrong!
If your worker is legally an employee, having a written agreement will not:
- override the employment relationships or make the worker a contractor, or
- remove your tax and super obligations.
Find out more...
- Read How do I know if I am an independent contractor? to find out if you can be classified as an independent contractor.
- Find out your entitlements as an independent contractor.
- Understand an independent contractor's taxation obligations.
- Check out the Australian Taxation Office's Employee or contractor section to determine if you're an independent contractor for taxation purposes.