Contractor Vs Employee – What's The Difference?

When you are a small business owner, it is important to know the difference between employee and contractor to ensure that your staff are set up correctly, particularly when looking at pay rates and working arrangements. The difference isn't always clear-cut. 

The relationship between an employee and a business is essentially a contract of service. In contrast, an independent contractor is defined as being engaged under a contract for their services.

We’ve put together some handy information to help you identify the differences between a contractor and employee. 

What Is An Employee?

An employee is a person that works in your business and is part of your business. This means that as a business owner, you and your business will mostly control how, where and when they do their work. Employees will also be part of your company’s payroll, which means they will receive wages and benefits in exchange for their hours worked.

What Is A Contractor?

A contractor on the other hand will usually run their own business or sell their services to others. They are often referred to as independent contractors, and would generally use their own processes, tools and methods to complete their work. They also usually negotiate their own working arrangements and may also work with more than one client at a time. 

Things To Consider When Hiring Employees And/Or Contractors

When you hire an employee, they perform the work, often as you direct them to do so. When you hire a contractor they are usually providing a specialist service. While as the business owner you may direct them in what you expect, they exercise a higher level of control over their work. This information sets up the basis to differentiate employees from contractors and also sets up the context around the relationship an employer has between employees and contractors.

You can look at a broader picture to get a clear idea of the relationship between the business and contractors. This includes – tools and equipment, degree of control over when and how to complete the work, the hours of work, an expectation of ongoing work, leave entitlements, the right to subcontract, the right to work for other businesses, assumption of financial risk, and method of payment. 

It is important to correctly define your relationship to ensure you are compliant with contracting regulations.