The Difference Between Employees and Contractors: Employment Law Update
When distinguishing between employees and contractors, Australian courts will look beyond labels to the nature of the relationship between the parties. This means that someone hired as a contractor could be found to be an employee, and vice versa. Employees and contractors have vastly different rights and entitlements, therefore, it’s highly important that employers understand the difference in order to avoid legal issues.
How do courts distinguish between employees and contractors?
In deciding whether someone is an employee or a contractor, courts will consider a range of different factors. No single aspect is more important than another; rather, courts will consider all the relevant factors and make an overall decision about the relationship.
While there is no individual test for determining whether someone is a contractor or an employee, there are some common factors that direct the court on the nature of the relationship. These factors are outlined in the table below, which has been adapted from the Australian Government Fair Work Ombudsman website.
|Control over work||Employees work under the direction and guidance of the employer.||Contractors maintain a high degree of control over work and how they complete it.|
|Hours||Aside from casual staff, employees generally have set work hours.||Usually, a contractor and hirer will agree on what hours the contractor will work to complete the task.|
|Independence||Employees operate under the employer.||Contractors operate their own business, which is separate from the hirer’s business.|
|Labour expectations||Generally, employees can expect regular work.||Contractors are usually hired to complete a specific task.|
|Commercial risk||Employees bear no financial risk.||Contractors are responsible for making a profit or loss on their work. Often, contractors bear the risk of loss or injury suffered whilst undertaking a task and will take out their own insurance policies.|
|Superannuation||Employees are entitled to superannuation payments.||Contractors usually pay their own superannuation.|
|Equipment||Generally, an employer provides all necessary tools and equipment that employees needs to complete their work.||It’s common for contractors use their own equipment.|
|Taxation||Employers are responsible for deducting tax for employees.||Contractors are responsible for paying tax and GST to the Australian Taxation Office.|
|Delegation||Employees cannot pay someone else to do their work.||Contractors can “sub-contract” someone else to do the work.|
|Payment method||Employees are usually paid in regular instalments.||Contractors are required to have an Australian Business Number (ABN) and either submit invoices for payment or receive payment at the end of a set task.|
|Leave entitlements||Employees are entitled to various leave payments.||Contractors have no paid leave.|
What are the implications of calling an employee a contractor?
Sometimes employers might misrepresent an employment relationship as contracting arrangement to avoiding paying employee entitlements. This is called a “sham contract”. Chapter 3, Division 6 of the Fair Work Act 2009 (Cth) forbids sham contract arrangements. Furthermore, the Act prohibits employers from dismissing an employee in order to engage them to perform substantially the same work as a contractor. If a Fair Work Inspector spots one of these sham arrangements, they are permitted to seek the imposition of penalties on the employer.
Ensuring your arrangements are correct
If you aren’t sure whether you should hire employees or use independent contractors for your business, you can speak to a solicitor about the best course of action.
Additionally, if you are concerned that your contractor arrangements could be construed as employment relationships or vice versa, you should seek legal advice.