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?
There are many factors that set apart employees and independent contractors, from their working arrangements to their financial and legal entitlements.
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.
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.
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.
Advantages
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:
Contractors can be more suitable for short-term projects or specialised tasks, while employees provide long-term commitment, stability, and potential growth within the company.
Ultimately, you must carefully assess your unique needs and goals to determine the most suitable choice for your organisation.
By doing so, you can optimise your human resources, better achieve your objectives, and foster a successful work environment.
If you would like to find out more about how you can use payroll software to manage your workforce, whether it be made up of contractors or employees, contact Pay Cat today.