Undedrstanding the difference between an employee and an independent contractor
There are a number of factors that may contribute to determining the difference between an employee and an independent contractor. However, no single indicator can determine if a person is a contractor or an employee. Sometimes contracts are drafted with the parties genuinely thinking they are contractors or employees when in fact they are not.
However, where one or more parties intentionally try to deceive, severe penalties apply to those who misrepresent the employment relationship and this is captured in the sham contracting provisions.
Generally, someone who is hired for a specific service or purpose and paid for this specific service or purpose will be deemed to be a contractor rather than an employee. An agreement will exist between the principal and the contractor. Importantly, this agreement will not be subject to the same legislation and implied terms as those within an employment contract.
When there is an agreement for work to be completed in exchange for payment, an employment contract will usually exist between an employer and employee.
There are some common indicators that may contribute to determining whether a person is an employee or independent contractor and should be used as a quick checklist.
- Is paid for the time that they work
- Receives paid leave
- Is not responsible for providing materials/equipment required to do their job
- Must perform specific duties required of their position
- Agrees to provide their personal services
- Works hours set by an agreement or the appropriate award
- Is recognised as part of their employers business
- Takes no commercial risks, and cannot make a profit or loss from the work that they perform
A contractor, on the other hand:
- Is paid for their individual job and the result achieved
- Generally provides most materials/equipment required to do their job
- Can delegate work to other entities as it sees fit
- Has control in the way the work is done
- Provides services to the general public and to other businesses
- Can accept and refuse work
- Takes commercial risks, and is in a position to make a profit or loss
Why is the distinction important?
This distinction between employee and contractor is crucial as it determines just what rights and obligations will be owing to that employee or contractor. An employee’s contract must comply with certain standards including the maximum hours of work per week, leave entitlements, public holidays and notice of termination. In addition, they will also be regulated through appropriate awards, any enterprise agreements that may relate to their industry and implied contractual obligations.
Consider the difference when drafting Employment Contracts
An employer must initially determine which relationship (employee or contractor) is most appropriate. Consideration can be given by the employer assessing the type of work to be done, establishing the level of control one will have over the work and then correctly labelling the relationship for what it is.
Penalties can also be imposed as set out below not only from Fair Work inspectors but also for unpaid superannuation.
Sham contracting arrangements
A sham contracting arrangement occurs where an employer attempts to disguise an employment relationship as an independent contracting arrangement. This is usually done for the purposes of avoiding responsibility for employee entitlements such as superannuation, annual leave and workers compensation for example.
Under the sham contracting provisions of the Fair Work Act 2009, an employer cannot:
- Misrepresent an employment relationship or a proposed employment arrangement as an independent contracting arrangement;
- Dismiss or threaten to dismiss an employee for the purpose of engaging them as an independent contractor;
- Make a knowingly false statement to persuade or influence an employee to become an independent contractor.
Under the Fair Work Act 2009, serious penalties apply to employers who contravene these provisions. Fair Work Inspectors can seek the imposition of penalties for contraventions of sham contracting arrangements and reform opt-in provisions. The courts may impose monetary penalties.
What should businesses do?
If you are an employer and fail to correctly categorise a person working for you as an employee or contractor, there are practical and expensive consequences. Not only are there penalties under the Fair Work Act for misrepresenting the employment relationship as independent contracting, but employers could also be ordered to make back payment of wages set by awards or enterprise bargaining agreements.
So, if there is no simple answer about the difference between an employee and contractor, what should companies do?
First, don’t think that the terminology in a contract will determine the issue, because the courts won’t. A contract which clearly sets out respective rights and duties between the parties will, however, be an important part of the factual matrix which a court will use to make its decision.
Secondly, you might be running on the assumption that your service providers are contractors. If those individuals do not run their own business, then they are not contractors. Considering the costs of getting this wrong, or proving otherwise, it is worth reviewing these relationships and being sure that you are not inadvertently treating an employee as a contractor.
If you need more information or if you need assistance or advice on how to proceed please call us on 1300 149 140 or email firstname.lastname@example.org.