Hiring an Employee vs. a Contractor: A Guide for Employers

Hiring the right talent is arguably just as important of a decision as choosing which products to create or services to deliver. In short, the right people can make your business thrive, rather than just survive.

But when it comes to picking between hiring an employee vs contractor, the decision isn’t always so straightforward. Both options have very different legal, financial and HR implications that can affect your business both now and into the future.

Misclassifying a worker as a contractor instead of an employee can also cause major legal repercussions, including fines from the Fair Work Commission and a visit from the Australian Taxation Office (ATO). Ignorance of the law does not excuse you from the consequences, so use this guide to understand all the major considerations when making hiring decisions.

Full-time employee vs independent contractor: Key definitions and differences

In Australia, most businesses will separate their workers into two broad categories:

1. Full-time employees: Hired directly by the business, these workers have a set number of hours per week and are entitled to benefits including (but not necessarily limited to) paid leave, superannuation and legal protections under the Fair Work Act.
2. Independent contractors: They provide services under an agreement or contract but operate as separate business entities. They are also responsible for managing their own taxes, insurance, super contributions and other benefits.

There are some big legal differences between employees and contractors, which can have knock-on effects for your business in a few different ways:

Employee:

• Level of control: The employer has control over work hours, tools, how tasks are performed, etc.
• Superannuation: The employer pays compulsory superannuation.
• Leave entitlements: Employees are entitled to paid annual leave, sick leave and long-service leave.
• Tax: The employer deducts tax (PAYG) from the employee’s wages.
• Termination: Covered under unfair dismissal laws.
• Work tools and equipment: Provided by the employer.

Contractor:

• Level of control: The contractor has autonomy in how they complete the work.
• Superannuation: The contractor is responsible for their own super.
• Leave entitlements: Contractors are not entitled to leave benefits.
• Tax: A contractor manages their own tax obligations.
• Termination: Contractors are not covered by dismissal protections; contracts end as agreed.
• Work tools and equipment: Contractors are responsible for their own tools and equipment.Be aware that if you fail to correctly classify your workers, you could be hit with penalties and even back payments.

Comparing the costs: Employee vs contractor

Beyond wages, you’ll want to consider hiring costs within the scope of taxes, benefits, equipment, compliance costs and more.

For regular employees, in addition to their wages, your business must cover superannuation, payroll tax, workers’ compensation, leave entitlements and the costs of training (both onboarding and ongoing).

For contractors, they will generally charge a higher hourly or project-based rate, but they also won’t be entitled to paid leave, superannuation or equipment (in most cases), which can make them a more cost-effective alternative for short-term or highly specific projects.

But don’t forget that there are some hidden costs of contractors. While they won’t expect standard employee benefits, businesses should factor in things like higher hourly/daily rates, as well as the potential legal risks if a contractor is misclassified. There might also be a limited long-term commitment and potential challenges in terms of continuity, especially if it ends up impacting your workplace culture.

Why do contractors tend to charge more than employees?

Independent contractors will charge higher rates to account for their tax and superannuation contributions, because they need to cover everything themselves. Another reality is that they have a lack of job security, as they won’t receive paid leave or be protected against unfair dismissal. Then there are the business expenses, as contractors have to supply their own equipment, insurance, training and more.

The higher rates are also a reflection of the risk burden that contractors take on, including fluctuations in work availability and the need to constantly source their own clients. But this flexibility also means businesses can scale their workforce up or down as needed without locking themselves into long-term commitments.

Making the right choice: Should you choose a full-time employee or a contractor?

If you’re at the stage where you are seriously considering whether to hire an employee or contractor, you’ll want to factor in a few things. The table below could be helpful for putting everything into perspective, so here’s what you’ll get from an employee vs contractor:

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Hiring an employee:

• Nature of work: Employees engage in long-term, continuous work where the business provides ongoing training and development.
• Control over work: The employer dictates the employee’s schedule and processes.
• Financial commitment: Employees work on a fixed salary plus benefits and overhead costs.
• Legal risk: Employees are entitled to protections under Fair Work laws, including dismissal protections, awards, etc.

Hiring a contractor:

• Nature of work: Contractors generally engage in project-based or specialised work with a clear start and end date.
• Control over work: A contractor manages their own schedule and ways of working.
• Financial commitment: A contractor’s cost depends on the project or hours worked.
• Legal risk: There is a legal risk when misclassified.

When to hire a contractor vs a subcontractor

A contractor will be hired directly by a business to complete a specific work task or project, whereas a subcontractor is engaged by a contractor to take care of tasks within the scope of a larger project.

As a business decision-maker, you might want to use subcontractors when:

• The main contractor lacks some specific expertise that’s needed for the project.
• Large-scale projects need multiple workers in various teams.
• You want to avoid direct hiring but still need extra workers for short-term needs.

As with employee vs contractor classifications, you’ll need to make sure both contractors and subcontractors are correctly classified under local tax and employment laws.

Unsure of the right choice? Consult an HR professional for expert guidance

While it’s true that getting to grips with employee vs contractor decisions can be tricky, and misclassification can have serious consequences, it’s not impossible when you have expert help to rely on. Consulting with an HR professional will mean you can rest easy that you are always complying with Australian employment law and making the smartest decisions around hiring for your business.

At HumanX, we are masters of HR consulting and organisational design to help businesses structure their workforce. Our team can give you expert guidance on:

• Employment classification and legal compliance.
• Cost-benefit analysis of employees vs contractors.
• Custom workforce-planning strategies.

Still unsure whether an employee vs contractor is the right fit for your business? Let HumanX HR help you make the right decision. You can learn more about our HR consulting services or speak to one of our experts by contacting us today.

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