What is the difference between a contractor and an employee?

It can be sometimes hard to work out what the difference is between your business taking on an employee and taking on a contractor. But it is important for you to get it right because both roles are protected and regulated by different legislation. Your obligations in terms of holidays, tax/PAYG, super and other things are different too. You can get into trouble if you get it wrong.

Before we get started, I am going to offer a word of advice. Do not be tempted in trying to disguise an employee as a contractor with sham contracting arrangements. It’s not the right thing to do to an employee (I know that sounds trite – but it’s true) but just as importantly, it’s against the law – you risk major penalties under the Fair Work Act and other legislation. Enough said!

Probably a fair way to to put it is to say that an employee is a part of your business while a contractor is running their own business.

Here are some GENERAL guidelines to help work out the difference.


Is paid by you for the time worked (or per item or service or by commissions earned). An employee is paid regularly – every week or month or whatever.

You deduct income tax.

An employee gets paid holidays, long service leave, carers leave, etc (casuals get loading in lieu of actual holiday time).

An employee can not pay someone else to do the work.

You (the employer) generally provide the tools, equipment or whatever else is needed to get the work done. Or at least pays something back to reimburse for the employees assets that are used for the work.

YOU are responsible for the work done. If there are problems – you pay to fix them. Not the worker.

You’re the boss. You say when, where and how the work is done.

The bottom line is that the employee is part of your business and can’t operate independently of you.


A contractor has an ABN and is paid based on a quote they have provided you with (that quote might be flat out quote for a job done or based on the hours worked or per item, etc, etc).

A contractor pays their own tax and GST. (But an individual contractor might like to volunteer for you to deduct PAYG from payments).

A contractor can sub contract. In other words, pay someone to help out or do the entire job for them.

A contractor generally uses their own tools and equipment.

A contractor is responsible for their work and that includes the cost or time needed to fix any problems or defects.

A contractor generally has control over how the work is done (but there might sometimes be stipulations in the contract that modify that).

A contractor does not get paid holiday leave.

A contractor is free and independent and running their own business. Once they have finished your job for you they can choose never to work for you again (so be nice!)

Superannuation is a little bit complicated. You do have to pay super contributions for employees – but you might need to do so for contractors under some circumstances. A contractor is entitled to superannuation contributions if they work under a contract that is “wholly or principally for the labour of the person” (I’m quoting here from the Superannuation Guarantee (Administration) Act 1992 (Cth)).

There are a number of criteria that the Australian Tax Office look at to decide if you should be making super contributions to a contractor and I would urge you to contact the ATO for the most up to date information if you are unsure about this. For more, click HERE.

Contractor – checklist

This page on the ATO website provides general information about using contractors and there are also links for further information about tax, super and other things to do with using contractors. Click HERE.

5 common employee or contractor myths busted

Business.gov.au has some guidelines on the differences between employers and contractors and some helpful resources for both.

On the bottom of the page there is a list of some very common misconceptions about the difference between an employee and a contractor. Click HERE.