Consultants offer flexibility, an outside perspective, and specialised knowledge as well as unique skills to help grow businesses. A consultant is an individual hired to provide expert advice in a particular industry or field. They can advise on a company’s internal or external operations. Furthermore, a consultant may be engaged for a single job or to complete work over a longer period.
When hiring consultants, it is important to determine whether they are contractors or employees. This is because the nature of the employment relationship will impact a business’ tax, super and insurance obligations. Also, incorrectly classifying an employee as a contractor can result in major penalties for businesses.
Difference between a Contractor and an Employee
Businesses may wrongly assume their consultant is a contractor because they have a registered ABN, the consultant invoices them for work done, or it is common practice in the industry to classify them as contractors. However, contractors and employees have different legal rights and obligations. Businesses face serious consequences if a consultant is incorrectly classified. Key factors, such as a consultant’s payment, entitlements, equipment, hours and level of independence, determine their employment status.
- Payment and entitlements
An employee is paid fixed wages, for example, payment for time worked, pay by way of commission, pay based on activity completed, or according to other fixed periodic sums. In addition, an employee receives entitlements such as paid leave, sick leave and superannuation contributions. Moreover, income tax is paid by the employer.
- Equipment and hours
A business provides an employee with most or all of the equipment needed to complete work and reimburses costs, such as work-related travel and training course fees. Another indication of an employee/employer relationship is the consultant having set hours for work.
- Control over the work
An employee completes work exclusively for the business, such that they are considered ‘interwoven’ within, or part of, the organisation. A business has the right to direct the way in which the consultant does their work, and work cannot be delegated or subcontracted.
- Commercial risks
The business is legally responsible for the work done by the employee and liable for commercial risks, including rectifying any defect or mistakes made by the consultant.
A contractor is hired to complete a certain service or perform tasks as delegated by the business. Businesses may hire contractors as consultants to provide data analysis services, computer software skills and other tasks requiring specialised skills. Contractors are particularly valuable for startups because they are often experts in their field, offer flexibility and are cost-effective.
Contractors provide quotes and invoices for their work. When hired as consultants, they are paid for a result achieved based on the quote provided. A quote can be calculated by hourly rates or price per item to determine the overall cost of the work.
A contractor hired as a consultant generally provides all or most of their equipment, tools and assets needed to complete the work. In this employment relationship, the consultant is not reimbursed for the cost of providing these assets.
- Control over the work, hours and commercial risk
Contractors work the hours required to deliver the services, subject to specific terms in any contract or agreement. Since they operate as an independent business, contractors are free to accept or refuse work. They may also subcontract or delegate work. Contractors in consultant roles take on commercial risk and must rectify or pay for any mistakes or defects. Moreover, contractors carry their own professional indemnity insurance.
Businesses can determine if a consultant is an employee or a contractor based on a combination of factors, no factor by itself will be conclusive. Conditions in the contract will also indicate the nature of the employment relationship. Correctly classifying the employment relationship is vital to avoid penalties for misrepresenting employees as contractors under Australia’s workplace laws.