Checklist: employee versus contractor

Five-step employee vs contractor checklist

This guide helps you establish whether a worker is an employee and an independent contractor based on factors including the work’s nature, who controls operations, financial elements, tax duties, and the relationship between the parties.

Recognising the distinction is essential for businesses to classify staff accurately and meet legal obligations. Apply this checklist to assess your organisation’s requirements and decide whether to engage an employee or an independent contractor.

1. Nature of the work

• Duration:

  • Employee: Continuous, with no fixed end date.

  • Contractor: For a defined term or specific project.

• Scope of work:

  • Employee: Carries out tasks directed or overseen by the employer.

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

2. Operational control

• Work hours:

  • Employee: Hours are determined by the employer.

  • Contractor: Sets their own schedule, subject to project deadlines.

• Location of work:

  • Employee: Performs work at the employer’s premises or another designated site.

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

• Method of work:

  • Employee: Adheres to procedures and methods prescribed by the employer.

  • Contractor: Employs their own approaches to deliver the required outcomes.

3. Financial Control

• Payment:

  • Employee: Receives regular payment (for example, a salary or hourly wage).

  • Contractor: Remunerated per project or via commission arrangements.

• Equipment and supplies:

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

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

• Profit or loss opportunity:

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

  • Contractor: Can earn a profit but also faces the risk of loss from their work.

4. Relationship

• Exclusivity:

  • Employee: Typically provides services exclusively to a single employer.

  • Contractor: May serve multiple clients concurrently.

• Benefits:

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

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

• Term of relationship:

  • Employee: Relationship is generally expected to be long-term.

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

• Integration:

  • Employee: Work is integrated into the company’s core operations.

  • Contractor: Work is an independent input and is not woven into regular business operations.

5. Legal and tax implications

• Tax withholding:

  • Employee: The employer withholds and remits taxes on behalf of the employee.

  • Contractor: Must submit and pay their own taxes.

• Legal liability:

  • Employee: The employer typically bears liability for acts carried out in the course of employment.

  • Contractor: Generally holds responsibility for their own actions and may require separate insurance cover.

This checklist provides general guidance and may differ according to local employment legislation and the precise terms of any agreement. Always seek advice from legal professionals about your particular circumstances.

Why must companies ensure workers are classified correctly?

Incorrectly classifying employees as independent contractors can lead to breaches of employment legislation, tax obligations and employee rights.

Companies should be alert to worker misclassification because it can cause significant legal, financial and reputational harm.

Misclassification may trigger litigation, tax penalties and the requirement to backdate employee benefits. Workers wrongly classified can be denied key benefits such as private medical insurance and paid leave, while ensuing legal action can tarnish an organisation's reputation and undermine trust among staff and clients. Furthermore, regulatory attention may prompt audits and operational disruption, and in extreme instances could lead to business restrictions or prohibitions in certain jurisdictions, constraining growth prospects.

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

A single platform to hire employees or contractors compliantly

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Remote is a game-changer for businesses seeking to manage misclassification risk effectively.

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