This checklist helps you distinguish between an employee and an independent contractor, using factors such as the type of work, operational control, financial considerations, tax responsibilities and the relationship between the parties.
1. Nature of the work
Duration:
Employee: Ongoing; no defined end date.
Contractor: Engaged for a fixed term or specific project.
Scope of work:
Employee: Carries out duties instructed or overseen by others.
Contractor: Delivers services to satisfy a particular contract or project brief.
2. Operational control
Work hours:
Employee: Working hours are set by the employer.
Contractor: Chooses their own hours, subject to project deadlines.
Location of work:
Employee: Typically works at the employer’s premises or another specified site.
Contractor: Often works remotely or at a location of their choosing.
Method of work:
Employee: Adheres to procedures and methods set by the employer.
Contractor: Uses their own methods to achieve the agreed outcomes.
3. Financial Control
Payment:
Employee: Paid regularly (for example, salary or hourly wage).
Contractor: Paid per project or by commission.
Equipment and supplies:
Employee: Equipment and supplies are provided by the employer.
Contractor: Provides and uses their own equipment, tools and materials.
Profit or loss opportunity:
Employee: Does not directly bear profit or loss from the work.
Contractor: Has the potential to make a profit but is also at risk of loss.
4. Relationship
Exclusivity:
Employee: Commonly works exclusively for a single employer.
Contractor: May supply services to multiple clients.
Benefits:
Employee: Entitled to benefits such as private medical insurance, pension and paid leave.
Contractor: Does not receive employer-provided benefits and is responsible for their own insurance and retirement planning.
Term of relationship:
Employee: Relationship is generally expected to be long term.
Contractor: Engagement lasts only for the duration of the contract or project.
Integration:
Employee: Work is incorporated into the business’s operations.
Contractor: Work is an independent contribution and is not normally integrated into day-to-day operations.
5. Legal and tax implications
Tax withholding:
Employee: Taxes are withheld by the employer.
Contractor: Responsible for their own tax filings and payments.
Legal liability:
Employee: The employer is generally liable for actions carried out in the course of employment.
Contractor: Usually holds responsibility for their own actions and may need their own insurance.
This checklist provides general guidance and may vary according to local employment law and the specific terms of any agreement. Always consult legal advisers for guidance tailored to your situation.
Classifying employees as independent contractors can lead to breaches of employment law, tax obligations and employee rights.
Companies should be alert to worker misclassification because it can have serious legal, financial and reputational consequences.
Misclassification may lead to legal claims, tax liabilities and obligations to retroactively provide employee benefits. Workers who are misclassified can miss out on key benefits such as private medical insurance and paid leave, while disputes can damage a company’s reputation and undermine trust with staff and clients. Regulatory scrutiny can also trigger audits and operational disruption and, in extreme cases, may result in restrictions or bans in certain jurisdictions, limiting your ability to expand.
For more information on the risks of misclassifying employees as contractors, refer to our comprehensive guide.
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