Employee or contractor: classification checklist

5-step employee vs contractor checklist

This checklist helps you distinguish an employee from an independent contractor by assessing factors including the nature of the work, the degree of operational control, financial arrangements, tax obligations, and the relationship between the parties.

Understanding the distinction is essential for organisations to classify workers correctly and meet legal obligations. Use this checklist to assess your organisation’s requirements and arrive at an informed choice on whether to hire an employee or engage an independent contractor.

1. Nature of work

• Duration:

  • Employee: Ongoing; no fixed end date.

  • Contractor: Fixed term; project-specific engagement.

• Scope of work:

  • Employee: Performs tasks under the direction or control of the employer.

  • Contractor: Delivers services to fulfil the terms of a contract or project.

2. Operational control

• Work hours:

  • Employee: Work hours determined by the employer.

  • Contractor: Sets their own hours within agreed project timelines.

• Location of work:

  • Employee: Typically performs work at the employer’s premises or a designated site.

  • Contractor: Frequently works remotely or from a location they select.

• Method of work:

  • Employee: Adheres to employer-prescribed procedures and methods.

  • Contractor: Employs their own techniques and processes to deliver results.

3. Financial control

• Payment:

  • Employee: Remuneration is regular (for example, salary or hourly wage).

  • Contractor: Remunerated per project or via commission.

• Equipment and supplies:

  • Employee: Equipment and supplies are provided by the employer.

  • Contractor: Uses their own equipment, tools and materials.

• Profit or loss opportunity:

  • Employee: Does not bear direct profit or loss risk for the work.

  • Contractor: Can make a profit but also bears the risk of loss from the engagement.

4. Relationship

• Exclusivity:

  • Employee: Typically employed exclusively by a single employer.

  • Contractor: May offer services to multiple clients concurrently.

• Benefits:

  • Employee: Entitled to benefits such as private medical insurance, pension and paid leave.

  • Contractor: Does not receive employer benefits; responsible for their own insurance and retirement planning.

• Term of relationship:

  • Employee: Generally expected to be long term.

  • Contractor: Engagement lasts only for the contract or project term.

• Integration:

  • Employee: Duties are integrated into the organisation’s operations.

  • Contractor: Work is an independent contribution and not integrated into core operations.

5. Legal and tax implications

• Tax withholding:

  • Employee: Employer withholds applicable taxes.

  • Contractor: Responsible for filing and paying their own taxes.

• Legal liability:

  • Employee: Employer carries liability for acts performed in the course of employment.

  • Contractor: Generally liable for their own actions and should maintain appropriate insurance.

This checklist provides general guidance and may vary with local employment laws and the particulars of each agreement. Kindly consult legal counsel for advice tailored to your circumstances.

Why should companies ensure workers are classified correctly?

Misclassifying employees as independent contractors can result in breaches of employment legislation, tax non-compliance and denial of employee rights.

Companies should be cautious about worker misclassification as it can give rise to significant legal, financial, and reputational consequences.

Misclassification may trigger litigation, tax assessments and the requirement to make retroactive benefit payments. Workers who are misclassified can lose access to important benefits such as private medical insurance and paid leave, and disputes of this nature can harm a company’s reputation with employees and clients. In addition, regulatory scrutiny may prompt audits and operational disruption and, in severe cases, lead to business restrictions in certain jurisdictions, limiting expansion opportunities.

For further details on the risks of misclassifying employees as contractors, please see our comprehensive guide.

A single platform to hire employees or contractors compliantly

Whether you hire employees, contractors or both, Remote can support your needs.

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Remote’s employment specialists understand local labour and tax laws, ensuring lawful worker classification as employees or contractors. We assist with legal, tax and payroll compliance complexities so you can focus on scaling your business without administrative overhead.

Remote is a valuable solution for businesses seeking to mitigate misclassification risks effectively.

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