Lessons · Accounting · employee or contractor, and why it is not a preference
Employee or contractor, and why it is not a preference
Whether somebody is an employee or an independent contractor is decided by the substance of the working relationship, not by what the contract calls them or what both sides would prefer. Control over how the work is done, who provides the tools, whether the person can send a substitute and whether they bear financial risk all bear on it.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
It is the most expensive mistake available in payroll, and it is made with good intentions constantly. Calling somebody a contractor removes the withholding, the employer contributions and the entitlements; if the relationship was really employment, all of that is owed anyway, usually with penalties, and usually discovered years later when the person or the authority raises it.
How to think about it
Describe the working relationship as it actually operates, then test it against the factors. Where the answers point at employment, the label on the contract does not save anybody.
Worked example
Who controls how, when and where the work is doneClose control points to employment.
Who provides the tools and bears the costA contractor usually carries their own.
Can they send somebody else to do itA genuine right of substitution points away from employment.
Do they carry any risk of lossAn employee is paid whether the job is profitable or not.
Your turn
Name what decides the classification, given it is not what the contract says.
Classification is decided by the of the relationship
Solve one, graded on the server
The trap
Believing a signed agreement settles it. Both parties can genuinely prefer contractor status and agree to it in writing, and an authority reviewing the relationship afterwards will still look at how it operated and can reclassify it.