INDEPENDENT CONTRACTOR vs EMPLOYEE KNOWLEDGE BASE
It is important for business to have an understanding of the distinction between genuine “independent contractors” and “employees”. In some circumstances, despite the terms of the contract between the parties, the parties may in fact be found to be in an employment relationship.
The law says that just because a person has an ABN and calls themselves a contractor does not necessarily stop them being regarded as an employee – and this means your business could be liable for such things as superannuation, employment entitlements, workers compensation and taxation.
Why Use Independent Contractors?
Independent contractors require less in-house administration as compared to employees. The contract between the parties specifies the work to be performed and it is up to the contractor to provide the resources and the time to do it.
The reason there is often less administration is because you are entering into a commercial relationship rather than an employment relationship and therefore there is less regulation of the relationship.
Contractors are typically more highly skilled than other types of workers. This is because they often work with other clients where they can draw on a range of work practices and technology or problem solving.
Also, if your business does not have expertise in a particular area the contractor provides a possible solution. A contractor can come in to do the work whilst existing employees receive the appropriate training required to perform the tasks. It might even be possible to draw on the experience of the contractor to provide such training to the employees.
A contractor is a good solution where you have fixed term or fixed project tasks in your business. The contractor can be used in much the same way as a casual employee for these types of engagement, covering emergencies and peaks in your workload.
Distinguishing Independent Contractors From Employees
An independent contractor is someone who is completely separate from an employer’s business. The relationship is often described as a contract for the provision of services, as distinct from a contract of service. It is a commercial relationship not an employment relationship and this is a critical distinction.
Where a business makes a contract with an independent business to provide specific services (without the obligation to “serve”), the relationship will encompass different rights and obligations to those of an employee (who would be engaged under a contract of service).
To determine whether someone is an independent contractor or an employee, the whole circumstances of the relationship between the parties must be considered.
Over time the courts have determined a number of tests which can help you to determine what it means to be in control, and therefore if the worker is an employee or contractor. No one test determines the question. Some tests will indicate employment and others will point to independent contracting. The courts weigh up all of the tests and decide if on balance the total picture points to employment or independent contracting.
We have translated these tests into a list of criteria which you can ask yourself to help work out whether the person is an employee or not.
The following factors suggest that a worker may be an employee:
- The employer has the right to control the manner in which the worker performs the work;
- The employer usually sets the worker’s hours of work;
- The employer supplies the worker with materials, tools and equipment to perform the work;
- The relationship is generally for an ongoing or fixed term;
- The worker works exclusively or mainly for the employer;
- The worker does the work himself or herself, rather than having the freedom to delegate it to others;
- The employer pays the worker’s business expenses;
- The employer pays the worker periodically (e.g. weekly, fortnightly, monthly);
- The employer withholds taxation from payments made to the worker and makes superannuation contributions on the worker’s behalf; and
- The worker is paid on an hourly basis regardless of how the work is performed.
The following suggest that a worker may be a contractor:
- The contract is with an interposed entity (e.g. a company or trust) who provides the worker to perform the work;
- The worker controls his or her own work and works independently;
- The worker is free to keep his or her own hours subject to contractual deadlines;
- The worker supplies his or her own tools and equipment, sets his or her own processes and supplies his or her own materials (although the client may supply the materials);
- The worker is usually paid a fixed sum, although that sum may be divided into progress payments over the contract period;
- The worker is responsible for meeting his or her own tax obligations and making its own superannuation contributions (in the case of a contractor that is a company);
- The worker is free to perform other work;
- The worker is free to delegate work to a delegate or subcontractor unless expressly provided otherwise in the contract;
- The relationship ends at the completion of a job or expiry of the contract period;
- The worker is responsible for taking out its own policy of insurance;
- The worker is responsible for the rectification of work; and
- The worker is paid by results rather than time and issues an invoice in order to get paid.
Further complexity arises from certain legislation that tends to “deem” certain persons as “employees” and “workers” whenthey are not employees at common law. For example, the following legislation at state and federal level often deems certain types of independent contractors as ’employees’ for the purpose of their respective entitlements and obligations:
- Payroll tax legislation;
- Superannuation legislation;
- Workplace health and safety legislation; and
- Workers compensation legislation.
However, deeming a person to be an employee for one purpose (e.g. taxation) does not necessarily make him, or her, an employee for all other purposes (e.g. workplace relations). Therefore, you should always get information from the relevant body that administers the legislation.
Independent Contractors Act
The Independent Contractors Act 2006 (Cth) applies to contracts between all independent contractors and constitutional corporations. Only one party to the contract will need to be a constitutional corporation in order for the provisions of the Independent Contractors Act to apply. Work being performed in a Territory by independent contractors or contracts entered into in a Territory in which an Independent Contractor is a party, will also be bound by the provisions of the Independent Contractors Act, even if neither party to the contract is a constitutional corporation.
The Independent Contractors Act currently applies to those contracts that are entered into after the commencement of the legislation, unless the parties enter into a reform opt-in agreement. A reform opt-in agreement can be entered into by the parties signing an agreement which states that the parties no longer want to be bound by the State or Territory laws which bind their contract. However, a party who attempts to coerce, threaten or make a false statement with the intention of getting the other party to enter into a reform opt-in agreement will be prevented from doing so.
The Independent Contractors Act prevents State Laws that deal with workplace relations matters from affecting contractor agreements. Such workplace relations matters include remuneration and allowances, leave entitlements of employees, hours of work of employees, enforcing or terminating contracts of employment, disputes between employers and employees, industrial action, and other similar matters dealing with the employment relationship.
Remedies that were available under State unfair contracts jurisdiction and prior to the Fair Work Act 2009 are excluded for those covered by the Independent Contractors Act. The Independent Contractors Act does preserve some State entitlements given to truck drivers and outworkers in the clothing and textile industry. Companies entering into commercial arrangements with independent contractors in these sectors should seek independent legal advice on how the Independent Contractors Act will affect these contracts.
The Independent Contractors Act introduced a new unfair contracts jurisdiction in Australia. However, the unfair contracts jurisdiction will not extend to those contracts created for private or domestic purposes or for contractors who are a body corporate, unless the work is done by a director or a member of the director’s family.
When hearing an application for unfair or harsh service contracts the Court will need to consider:
- The relative strength of the bargaining positions of the parties;
- Whether there was any undue influence or whether any unfair tactics were used;
- A comparison of the remuneration under the service contract against what an employee would receive for the work and other service contracts for similar work in the industry;
- Any other matter the Court considers relevant.
If the Court finds that the contract is unfair or harsh on a party, it can either set aside a part or the whole contract or it can choose to vary the contract. The Court cannot make an order for a payment of money in connection with any contract declared partly void or varied.
The Independent Contractors Act does not provide protections from the obligations under the Fair Work Act 2009 (Cth) or relevant state legislation, if the arrangement between the parties is deemed to be a sham arrangement.
Fair Work Act
The Fair Work Act 2009 (Cth) prohibits “sham arrangements” where an employer treats an employee as an independent contractor in order to avoid having to meet its obligations to that employee. The Act provides that an employer must not:
- Knowingly represent to a person that their contract of employment is a contract for services under which the person performs work as an independent contractor;
- Dismiss, or threaten to dismiss an employee in order to engage them as an independent contractor to perform the same work under a contract for services; or
- Make a statement that the employer knows is false in order to persuade or influence an employee to enter into a contract for services under which the employee will perform the same work for the employer as an independent contractor.
Penalties for sham contractor arrangements under the Fair Work Act include injunctions, reinstatement, compensation and penalties.
The Fair Work Act also states that adverse actions can include certain actions taken by a principal against an independent contractor, and by an independent contractor against its contractors or employees. In this context, adverse actions include termination of a contract, ceasing work under the contract or refusing to supply goods and services to an independent contractor, among others.
Issuing The Independent Contract
Once you are in a position to engage someone as an independent contractor you should then issue them with a contract.
Need a template? All subscribers can access an Independent Contractor Agreement template.
For each separate engagement you must make sure that the correct information has been inserted into the contract, e.g. payment schedule and the contractor’s details.
About Employment Innovations
Employment Innovations is one of Australia’s leading providers of employment services designed to increase productivity and ensure compliance. Its services and solutions include all the tools that every Australian small to medium sized employer needs – including workplace advice, legal services, payroll solutions, migration, human resource management and HR software.
The information provided in these knowledge base articles is general in nature and is not intended to substitute for professional advice. If you are unsure about how this information applies to your specific situation we recommend you contact Employment Innovations for advice.
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