The Importance Of Knowing The Difference Between An Employee And A Contractor

Do you know the difference between an employee and a contractor?

As the owner of a small business or startup, it is really important for you to know the difference between an employee and contractor, as getting this wrong might have huge consequences for your company.

To avoid these legal consequences for your small business or startup, let’s go through the factors that affect the classification, as well as the practical differences you need to be aware of the two.

Factors That Affect The Classification…

Degree Of Control Over How Work Is Performed & Hours Of Work

If your worker performs tasks under your direction on an ongoing basis, they are more likely to be classified as an employee.

If they are provided with autonomy and can control how the work is completed themselves, they are more likely to be an independent contractor.

Expectation Of Work

An employee usually has an expectation that they will have ongoing work.

Whereas, a contractor is engaged for a specific task for which they have a particular skill set for.

Tools, Equipment And Uniform

If you are providing tools and equipment to your workers, they will be classified as an employee.

However, if the worker uses their own equipment, they are likely to be an independent contractor.

Something as simple as having your company logo printed on the equipment used by the worker, has the potential for an independent contractor being classified as your employee.

Method Of Payment And Leave Entitlements

Regular payments and leave entitlements may be an indicator that the person is an employee.

Independent contractors will give you an invoice once the work you required of them is completed. They also don’t receive paid leave.

That being said, just not paying them regularly and giving them no leave entitlements doesn’t mean that they’re an independent contractor.

Similarly, just because you pay an invoice, doesn’t mean the worker will be seen as an independent contractor.

These things need to be considered with the other factors mentioned above.

Practical Differences – Risk, Pensions And Tax

As an employer, you will be held legally responsible for all the actions your employees perform under their contract.

Whereas, an independent contractor will typically be liable for inadequate work or any work related injuries.

It is for this reason that independent contractors will often have their own insurance policy.

Pensions are another thing to consider. You must pay pensions contributions for employees, but this is not required for independent contractors.

A similar situation applies for tax.

As an employer, you have an obligation to withhold tax from the regular payments made to your employee.

Whereas, a contractor will manage their own tax affairs.

You can see how an incorrect classification can quickly add up and be a significant financial risk for your business.

What To Take Away…

Knowing the difference between an employee and contractor is essential for any small business or startup owner.

It plays an important role when hiring people and defining their obligations as well as your responsibilities to them.

If you’re unsure of whether your workers are employees or contractors, do not hesitate to get in contact with us, we are here to help!

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