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Australia is a highly desirable location for companies growing internationally. Its strong economy, access to large markets across the Asia-Pacific region, trained and educated workforce, and high per capita income mean your company can flourish and find customers easily. Australia ranks 20th in the world in gross domestic product (GDP) per capita, ahead of Germany, Canada, and the United Kingdom, so Australians tend to have high levels of disposable income to spend on exciting products and services.
As you build new teams, you’ll need to know how to hire and pay your contractors correctly. Let’s examine the factors that make employees different from independent contractors in Australia and discuss your options for paying an Australian contractor properly.
The difference between an employee and a contractor in Australia
Like many other countries, Australia uses several criteria to distinguish between employees and contractors. The main differences between these workers come down to a few primary factors.
1. Payroll and taxes
When your company hires Australian employees, you generally add them to your payroll. Regularly, often monthly, you issue their paychecks. When you do, you withhold payroll taxes, which go toward employee contributions to Australian social programs. Your company contributes to those social programs at the same time.
With your contractors, your approach will be different. They can be paid on a regular basis or at the end of the contract or project. When your company pays contractors, you do not contribute to social security or withhold payroll taxes on your contractors’ behalf. Your contractors receive the total amount of gross pay stipulated in the initial agreement, so they must make their own tax payments and contributions toward their superannuation retirement fund, or “super.”
When you hire Australian employees, you provide them with much more than a wage or salary. Under Australian labor law, Australian employees are entitled to receive health insurance.
Employees should also receive at least four weeks of vacation time per year and at least 10 days of personal, sick, or caregiver leave. Many companies choose to provide five or six weeks of paid vacation instead. Employees must also receive the seven paid holidays recognized by the government and the additional paid holidays mandated in each state or territory.
Your contractors will receive none of these benefits. They are entitled to the agreed-upon monetary remuneration and nothing more. To compensate for the lack of benefits, they often charge more than an employee would make during the same timeframe.
3. Notice and severance
If you hire Australian employees and wish to terminate their contracts or agreements, they are entitled to notice periods. The length of the required notice period varies with the employee’s tenure at the company.
Employees are also entitled to redundancy pay if their positions become redundant and the company no longer needs anyone in that role. When a termination occurs because of redundancy, employees must receive redundancy pay. The amount depends on the employee’s tenure with the company.
Contractors receive neither of these benefits. Redundancy does not usually apply, since most, though not all, contractors perform relatively short-term jobs with clear timeframes. If a company wishes to part ways with a contractor, a notice period may or may not apply, depending on the contract. However, the contract terms may specify that the company cannot terminate the contract without penalty.
4. Form of working relationship
Apart from the specific taxes and benefits that apply to employees but not contractors, the overarching form of the working relationship tends to differ substantially as well. In Australia, the fundamental distinction between employees and contractors involves whether they work for themselves or your company. In general, contractors’ contracts tend to specify a certain outcome the company hopes to attain, such as the construction of a new building or the setup of a new IT system. On the other hand, employees’ contracts tend to be for the general provision of ongoing labor.
The Australian Taxation Office (ATO) also recognizes several distinct factors that help to differentiate between contractors and employees:
- Ability to subcontract or delegate: Employees do not typically delegate work. Contractors have the right to delegate work to subcontractors as they see fit.
- Basis of payment: Employees receive regular payments for their work. They might get wages or a salary for the time worked, a commission, or a fee per activity or item completed.Contractors generally choose the work they want to take on by submitting a quote or bid for it and then receiving payment for the result.
- Equipment and tools: Employees usually use the company’s equipment, such as computers, machinery, and other tools. If they procure their own, the company often reimburses them for the expense. Contractors typically provide their own tools instead of using the company’s resources.
- Commercial risks: Employees assume no commercial risks when they work for your company. Your business bears all the liability and shoulders any losses. Contractors take commercial risks because they are legally responsible for their own work, including correcting any defects.
- Control over the work: Employees usually have less control over their work than contractors. They have little say in what tasks they perform and how they perform them. They also tend to receive training, direction, and oversight from a superior rather than working independently. Contractors, on the other hand, control when, where, and how they work. They tend to manage their own work rather than taking direction from a superior.
- Independence: Employees do not work independently — they work for your company. In Australia, courts often take terms of fidelity and loyalty to imply an employer-employee relationship. Contractors, on the other hand, tend to work independently, for themselves.
At times, the distinction between an employee and a contractor is ambiguous. Some aspects of the working relationship may point toward an employer-employee relationship, while others may be more similar to elements of a contractor relationship. Companies should consider the relevant factors holistically to guide their decision making.
Why is it important to classify Australian employees and contractors properly?
In Australia, as in many other countries, classifying your contractors and employees correctly is extremely important. The ramifications of a misstep in this area can be severe.
Remember that Australian employees receive desirable privileges that Australian contractors do not — comprehensive benefits and employer-shared payroll taxes, for instance. In many cases, though not all, being an employee rather than a contractor is to the worker’s benefit. However, hiring contractors rather than employees is often to a company’s advantage because the company will not have to provide paid benefits, notice, or severance pay. These conditions can create an incentive for companies to classify employees illegally as contractors, a practice known in Australia as “sham contracting.”
The Australian government, like many others, has implemented financial penalties to ensure fairness for workers and that it receives the payroll taxes it requires. Misclassifying employees as contractors can cost a company thousands of dollars in back taxes and thousands more owed to the workers in compensation for their lost benefits. These added compensations could potentially cost a company millions of dollars, especially if the misclassification involves large numbers of workers or has gone on undetected for years.
To safeguard against financial losses, your company may need to research Australian law thoroughly or speak with tax and employment experts before hiring contractors. However, in many cases, your needs and job expectations genuinely fall into the category of contractor work. In that case, you will need to know how to hire and pay contractors most effectively.
How to hire contractors in Australia
Hiring an independent contractor in Australia requires careful judgment and adherence to the relevant rules and best practices.
Australian independent contractors should have contractor agreements that outline their work, pay, and expectations. The law allows these contracts to be either written or verbal — we recommend strong written contracts for clarity. Independent contractors are not eligible for other forms of Australian employment agreements, such as awards.
When you hire Australian contractors, be sure to define your expectations and the established compensation clearly. Give all monetary amounts in Australian dollars, clarify the necessary tax practices and working arrangements, and specify which country’s regulations will apply. Clearly distinguish your contractor agreements from your employment agreements. Ensure equitability in your contracts as well — under the Independent Contractors Act of 2006, contractors may ask the courts to review contracts they deem harsh or unfair.
Where to hire Australian contractors
When you’re considering how to recruit Australian contractors, your company may turn to various sources. You might advertise on sites such as LinkedIn, which are relatively well known and can turn up an extensive pool of qualified candidates.
Alternatively, you might search online directories or digital bid boards specific to certain industries, including construction. You can comb through the listings to identify contractors who meet the criteria for the job. Speaking with your professional contacts is also an excellent way to find contractors through word-of-mouth recommendations.
Tax practices for paying Australian contractors
Hiring employees requires different tax considerations than hiring contractors in Australia. As we’ve discussed, you withhold payroll taxes from your employees’ paychecks and contribute to social security programs on their behalf.
In Australia, these payroll taxes go to the state government. Rates vary significantly with the state or territory, ranging from zero percent to 4.95 percent in South Australia, for instance. They stand at 4.85 percent in Victoria and New South Wales and reach 6.85 percent in the Australian Capital Territory. Employers must also make a quarterly payment equalling 10% of each employee’s ordinary time earnings into the superannuation retirement fund.
You will not take these withholdings or make these contributions for contractors. Contractors are responsible for their social security and tax payments.
Income tax payments
In Australia, the ATO levies income taxes on both independent contractors and employees. However, the government taxes contractors at the company rate, which tends to be lower, instead of at the employee rate.
Though the employer does not withhold payroll taxes, the contractor and company may make arrangements for income tax withholdings through Australia’s Pay As You Go system, where employees pay income taxes throughout the year, usually once per quarter. Contractors may use this system if they choose.
Contractors can also claim various business-related tax deductions because they work for themselves. These advantages are often enough to offset the disadvantages of going without paid leave and other benefits.
Australia has tax treaties with more than 40 international tax jurisdictions, so your contractors can be free from double taxation in many instances.
How to pay contractors in Australia
Paying contractors in Australia is a task your company can complete in several different ways. Let’s examine a few of the options, along with their pros and cons:
- Payroll services: You will not be able to pay your Australian contractors through your company’s payroll department since you won’t issue them recurring payments or withhold payroll taxes from them. Usually, you would need to have them submit invoices, and you would pay them through your accounts payable department. However, some payroll services companies allow you to pay your independent contractors through their platforms. This option can be expensive, and it is not ideal for all international transactions.
- Australian banks: If your company chooses to register in Australia, you will need to open a corporate bank account, which you can then use to pay independent contractors. However, official registration is time-consuming and complex, and the associated paperwork and delays may mean your company turns to other options.
- Global wire transfer services: Alternatively, you might go through a bank using an international wire transfer service instead. This service connects financial institutions worldwide, enabling you to send payments quickly and conveniently. However, they can be expensive, with substantial bank fees and unfavorable exchange rates adding to your expenses.
- International money orders: International money orders are traditional and dependable, so you can use this option if reliability is your main priority. However, they can be slower and more inconvenient than the alternatives because of the physical requirements for purchasing them, on the company’s end, and depositing them, on the contractors’ end.
- Digital wallets: Digital wallets like PayPal are faster and more convenient than solutions like international money orders. However, they do not work for transfers to all countries. Australia does allow PayPal, so if your home country permits, you can use this service to send payments to your Australian contractors.
- Cryptocurrency: In Australia, cryptocurrencies like Bitcoin are legal to use but not classified as legal tender. Australia treats cryptocurrency transactions as barter transactions. If your company deals in cryptocurrency, be aware that your contractors may not know how to handle it for tax purposes or how to access the payments.
- Working with an EOR: This option is often ideal for handling and paying your Australian contractors. When you work with an Employer of Record (EOR), experienced professionals can handle your contractor payments for you. They ensure correct worker classification, help keep your company compliant with the law, and issue accurate, timely payments.
Build international teams with support from Globalization Partners
When your company is ready to build new teams in Australia, reach out to Globalization Partners. We help you add team members quickly and compliantly through our global employment platform.