Contractor vs Employee: How to Make The Right Choice For Your Business

Business owners are usually required to make several important decisions at least every hour. So they need to be absolutely certain they’re making the right choice, especially when it comes to decisions that can improve and grow their company, like hiring the right workers.

This is more than just ensuring business owners have the best people for the task. Deciding whether to hire workers in a contract or employment capacity is crucial, for both legal and financial reasons.

So, if you’re a business owner trying to choose between employees and contractors, you’re probably wondering: what are the differences? And how can you make sure you’re choosing the right option for your business?

Important factors need to be considered when determining which one is right for you, and many businesses have made the mistake of engaging one or the other without fully understanding the differences.

Independent Contractors

An independent contractor operates as their own business, though they can use several legal structures, such as a sole trader, partnership or proprietary limited company.

It also means they forego employment entitlements, and are responsible for managing their own income tax, work and finances. They can also elect to make their own superannuation contributions or not.

Independent contractors typically provide services for a specific task or project for a predetermined amount of time.However, some contractors may offer support on an ongoing basis, depending on the nature of their expertise and the needs of the hiring business.

An independent contractor is responsible for supplying their own tools, equipment, and insurance, which can alleviate both financial risk and logistical burdens on the hiring company. 

This setup allows businesses to focus on their core operations, while benefiting from the specialised skills and resources provided by the contractor.

Invoicing for their services is another difference between employees and contractors, and is a key aspect of independent contractor work. 

An independent contractor will usually charge the business directly, and within a pre-agreed structure like fortnightly, monthly or on project completion. 

This can simplify the payment process for businesses and help them maintain a clear overview of project costs and budget allocations. They don’t need to worry about payroll systems, and can simply pay the invoice when due. 

Other factors of engaging an independent contractor include maintaining control over their own hours and work location, which can be advantageous for both the contractor and the hiring business. 

It allows a company to manage resources more cost effectively, and set specific project deadlines – as long as the work performed is in line with any determined scope of work or agreement. 

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Employees

An employee works directly for a business under an employment contract. This provides them with a more structured and stable work environment, as they take on a specific role within the company and contribute to its long-term success.

Employees will generally oversee responsibility for specific tasks or areas in the company, and can be employed in a casual, part-time or full time capacity. 

In most cases, employers will give employees their own equipment, tools and insurance, to provide them with the resources needed to perform duties effectively. This arrangement also helps maintain an equitable work environment, and fosters collaboration among team members.

Workers receive regular wages or salaries as compensation for their work, which provides them with financial stability and allows the employer to maintain a consistent payroll structure. This can be great for budgeting and financial planning purposes, as you’ll always know what you’re paying each month.

One of the key aspects of an employee's role is working under the direction and control of their employer. 

This means they follow established company policies, procedures, and guidelines, and work closely with their team members, managers or supervisors to ensure alignment with the organisation's goals and objectives.

There will often be clauses in employee contracts that state employees aren’t able to provide additional work to other employers without written permission from their employer, which can help employees meet the work expectation laid out by their employer.

Employees are also entitled to various benefits under the Fair Work Act. Companies are required to provide various entitlements, such as annual leave, sick leave, superannuation, and workers' compensation. 

These entitlements can contribute to a better work-life balance, job satisfaction, and overall well-being, while also providing a safety net for employees in case of unforeseen circumstances.

Employees enjoy a more structured and stable work environment, with ongoing roles, regular wages, and employer-provided resources. 

They work under the direction and control of their employer and are entitled to various employment benefits. If an organisation fails to comply with those benefits, they risk legal and financial consequences. 

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Advantages

• Flexibility: Contractors can offer higher flexibility, which can be ideal for businesses needing to manage fluctuating workloads or handling short-term or urgent projects.
• Cost savings: As contractors are responsible for their own expenses, employers can potentially save on overhead costs like office space, equipment, and benefits.
• Expertise: Contractors often possess specialised skills, allowing business owners to utilise their expertise on an as-needed basis.
• Reduced legal risk: Employers are not liable for providing entitlements to an independent contractor, which can reduce any potential legal risks in the instance of regulatory non-compliance.
  

Independent Contractor Disadvantages

• Little control: Contractor working arrangements don’t provide employers with as much control over the process. This can lead to potential inconsistencies in service or quality. 
• Limited loyalty: Contractors can occasionally be less committed to the long-term success of your business than employees who have been working with you for a long time.
• Legal complexities: Enlisting the support of a contractor involves navigating a variety of legal and taxation requirements which can be time-consuming and complex, and can lead to issues further down the road if not handled correctly.
• Higher hourly rates: As they are their own business, contractors can set their own rates. Generally, these rates are higher than typical workers as this allows them to adequately cover their own expenses, tax deducted, and insurance.

Additionally, while an independent contractor comes with higher flexibility, it’s important to note they still have workplace rights, even without the standard employee entitlements. 

These include:

• The right to set their own fees and working conditions with clients of their choosing.
• The opportunity to work for more than one client at any time.
• The ability to operate their own business and make decisions about how to perform their work.
• The choice to determine their working hours and location, as well as how they work.
• The authority to decline work that they feel is outside their skill set or expertise.
• The right to receive payment for their work within a reasonable timeframe.

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• Long-term commitment: Employees are more likely to be committed to the success of your organisation, fostering stability and continuity.
• Greater consistency and control: Employers have greater control over the work processes and quality of their employees. They can delegate work freely, and ensure consistency across the different areas of the company.
• Staff development: Employers can invest in the training and development of their employees, building a skilled and loyal workforce.
• Improved team dynamics: Employees typically form stronger relationships with their coworkers, which can lead to better teamwork and collaboration.

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• Increased costs: Employers are responsible for various expenses, such as employee benefits, office space, and equipment.
• Legal obligations: Employers must meet a range of legal requirements related to employee rights and entitlements, including leave, superannuation, and workers' compensation.
• Reduced flexibility: Employing permanent staff can reduce a business's ability to adapt quickly to fluctuating workloads or changing market conditions.
  

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