For international businesses wanting to recruit workers in Australia, determining whether or not to hire them on a contract or permanent basis can have a significant impact on their business.
A PEO agreement is a unique arrangement that allows international companies to hire workers in countries like Australia without them having to establish a local entity. With this comes certain nuances that need to be acknowledged when deciding whether to hire permanently or on a contract basis.
Often, the lines between employer and contractor can be blurred, as both have subtle differences in how agreements are drawn up and work is undertaken.
Generally speaking, the key differences are:
Contractors and subcontractors are third-party operators that run their own businesses, whether that be as a freelancer or sole trader. They offer their specialised services to an array of businesses and business sizes and use their own processes, internal tools and strategies to complete the tasks their clients require.
Permanent employees work within a business they don’t own. They generally don’t have jurisdiction over when, how, where, or why they complete the tasks assigned to them.
Breaking it down, the difference between permanent employees and contractors looks like this:
|Fixed annual salaries||Paid regularly, based on an agreed hourly or daily basis|
|Employed on an ongoing basis||Fixed contract length that can vary from weeks to years.|
|General business tasks and project/campaign work.||Primarily project-based for fixed deliverables|
|Leave entitlements (annual leave, personal/sick leave etc.)||No leave entitlements|
|Employer pays tax on worker’s behalf||Contractor manages their own tax and other deductions (or outsources to third-party accountants).|
|Training is provided to fill skill and experience gaps||Usually no training providing and hired for their specialist skills|
Contractor vs. permanent employee – why is proper classification so important?
When deciding whether or not to employ a permanent worker or outsource to a third-party contractor in Australia, there are certain legal obligations you need to be aware of. If you don’t classify your workers accurately, you could be in breach of Australia’s employment law. Classifications affect workers’ tax, super and obligations, and you could be penalised for classifying them incorrectly.
When a business treats its employees as if they’re contractors, it could be liable for penalties and charges in accordance with Australian employment law. If the Australian Taxation Office catches wind that you’ve improperly classified your staff, you’ll be up for penalties. You’ll have to pay a fine for not deducting tax from your employer as well as super guarantee charges consisting of back payment of your employee’s superannuation contributions, interest and admin fees.
According to the Australian Taxation Office (ATO), there is a specific set of workers who are always permanent employees. These include apprentices, trainees, labourers and trade assistants.
When you work with PEOs, labour hire or other on-hire arrangements, your business pays the firm, who then pays your worker a salary, pay-as-you-go (PAYG) tax withholding to the ATO, super and fringe benefits tax obligations. For all such arrangements, employing your workers permanently is essential.
A full comparison of how the ATO determines permanent employees compared with contractors can be found here.
Why hire permanently?
While there are some advantages of hiring contractors over permanent employees – flexibility and agility being two – hiring people permanently has far more advantages, particularly when hiring workers remotely by engaging with a professional employment organisation such as Australia PEO.
Permanent jobs offer a level of stability that makes them more appealing for professionals, particularly those in specialist professions. When hiring overseas, securing specialist staff can be challenging. Once contracts are signed, specialists are bound by certain law that ensures they don’t leave their employer in the lurch. They are legally obligated to give their employer notice of resignation as set out in their employment agreement. Often this is one month notice.
When hiring permanent workers in Australia through a PEO, you also benefit from their skills long-term. It’s stable for the worker and equally stable for your business and teams.
Employee career development
With permanent employees, companies have more scope to invest in role development and career progression. Eventually, these same employees can work their way up the ranks within the business and take on future leadership roles – they become irreplaceable members of the company and play a key role in your business’s growth.
In return for job longevity, companies should expect their retention rates to remain high and their highly skilled professionals to remain in the business.
One added benefit of increased retention is minimising staff training. A 2021 study from the HR Industry Benchmark Survey Australia and New Zealand found that the true cost to hire and train new staff is about AU$23,000. It takes an average of 41 days to fill roles, sometimes longer when recruiting for specialist roles.
Permanent workers also tend to be more passionate, loyal and involved in the success of a business than contractors, who – as external stakeholders – are more detached from the day-to-day triumphs and challenges of a business. They’re more likely to immerse themselves in company culture and social events, unlike contractors who work more independently and come and go.
Collaboration can be more challenging for workers in PEO arrangements where employees work remotely. Permanent arrangements make it easier for teams to mesh and form solid and collaborative relationships virtually.
The benefits of a permanent role are unsurmountable for employees too.
Particularly for workers hired through a professional employment organisation, job stability is an essential aspect when there is often no local office as a company base in the country.
Unlike contractors, permanent employees are entitled to personal leave (10 working days a year) and holiday leave (20 working days a year). They have their superannuation and PAYG tax contributions made by the employer on their behalf.
Many permanent roles also offer benefits like parental leave packages, gym memberships and health insurance that are otherwise not offered to contracted workers for the same businesses.
When hiring workers through Australia PEO, the advantages that come with employing permanent workers instead of contractors can’t be ignored. Speak to Australia PEO today about hiring skilled workers in Australia remotely.