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Is Your Contractor Actually An Employee?

Contracting (and freelancing) have recently emerged as a growing alternative to the traditional employment relationship. It makes perfect sense to hire a contractor to get a particular job done, and there are plenty of reasons why a business may do so. The job may require a set of skills that none of your employees has. You may only need someone for a short timeframe to clear a backlog of work. Or maybe you just want to avoid having to go through a formal recruitment process. However, there are risks in engaging a contractor - especially if that 'contractor' is in fact your employee at law and you don't comply with your employment law obligations (because, after all, you thought they were an independent contractor running their own business!).

More Complicated Than You Think

For example, the fact that an individual is called a ‘contractor’ on paper, sends your business invoices with an Australian Business Number (ABN) and uses a registered business name does not necessarily mean that they are an independent contractor to your business at law. Courts can still look behind a contract to define the true relationship between the parties. If the true relationship is that of an employer/employee, then it doesn't matter what your contractor agreement says - your business has legal obligations to that individual as an employer that it cannot contract out of under legislation.

The key point to remember is that the court will look at a variety of the issues outlined below to make a determination on the status of the relationship. While some can be more important, it is the totality of the relationship that the court will be trying to determine. For each there are a variety of exceptions that, taken at face value, may lead one to believe the person is actually an employee when in fact they are an independent contractor. However that is the exact reason why the court looks at the relationship as a whole.

So What Are The Important Considerations The Court Will Consider To Determine Whether Your Contractor Is Actually An Employee?

1. The measure of control exercised by your business

An employer generally has the right to control how, when and where a worker performs their duties. Further, each of the tasks are usually performed at the request of the employer. In comparison, an independent contractor runs their own business to achieve a stated result. A contractor maintains discretion and flexibility as to how, when and where work is completed (although the contract between the parties may specify some terms as to materials used and methods of performance). While they may be asked to work on the premises, contractors can in theory work pretty much anywhere they can get the work done. Again, there are exceptions to this like in the case of independent contractors who are required, by the contract, to perform the work at the premises.

2. Payment

An employee is generally paid a wage for an agreed amount of hours that they work for the period of their employment.  Contractors, on the other hand, are generally paid an agreed fee in exchange for performing an agreed scope of work. While contractors may ask for part-payment upfront, their fees become due and payable to them after they complete a project or a stage of a project. By contrast, employees are generally paid at regular intervals for performing an agreed scope of general activities during their set work hours.

3. Entitlement to leave

Employees are entitled to annual leave, long service leave and sick leave. Employees also receive superannuation contributions from their employer, which gets paid into a nominated superannuation fund. These entitlements are usually provided for in a written contract. In comparison, contractors do not receive any form of paid leave and are generally responsible for their own superannuation contributions. 

4. Exclusivity

Employees usually work exclusively for their employer, whereas, contractors are free to enter into contracts of work with multiple clients.

5. Type of work

The work of an employee is usually essential to the business carried on by the employer. The employee is working in the business of the employer. A contractor on the other hand carries on their own business, independently of the employer and as distinct from the employer’s business.

6. Tools and equipment

Employees generally perform their job using tools and equipment provided by the employer, whether it's computers, earth-moving equipment or a specific uniform. If they need something else to do their job, the employer either buys it, reimburses them or gives them an allowance. A contractor, on the other hand, generally provides their own set of equipment or tools. If they require more equipment to undertake the work, they will incur the cost of buying it. There are clear exceptions to this, for example a requirement that tools be provided under a contract, but it is simply another factor the court will consider.

7. Risk and the rectification of faults

Employees are generally not personally liable for any loss or other harm that comes from them performing their usual work activities – in most cases, their employer is responsible for the acts and omissions of that employee.  By contrast, contractors are able for their own actions and if they have not performed work to an acceptable standard they usually have to rectify that work at their own cost and without additional compensation.  This means that contractors may incur a loss on performing work on a project, whereas employees do not bear this risk.

8. Tax

Employees have tax deducted from their pay by their employer, whereas contractors pay their own tax (including GST) directly to the ATO.

Navigating The Balancing Act

The distinction between employee and contractor isn’t always as easy to spot as it may seem. A contractor may have all of their equipment supplied, or get paid every fortnight. They may even receive superannuation contributions. It's because of this that the ATO has come up with an Employee/Contractor Decision Tool (https://www.ato.gov.au/calculators-and-tools/employee-or-contractor/) to help make the distinction.  When in doubt, it’s best to check with your lawyer.

Why Is This Even Important?

It's critical to make sure you understand exactly what type of relationship is in place as employees and contractors have different rights and entitlements. If a contractor is likely to be deemed an employee, the business could be liable for a variety of entitlements, like leave entitlements from the point when the person would be deemed to be an employee, and if the ‘contractor performs their work negligently your business could be liable for any losses someone else suffers as a consequence of their negligence. Given employment relationships can be governed by awards and other instruments there could be other enforcement action from government authorities involving fines as well as the liability to the individual involved.

There are many other issues that can arise, so it is well worth being on top of it in your business and it's necessary to build in processes to make sure the status of each individual is clear and your business is meeting its legal obligations for each individual.

If you are still unsure whether your contractor is actually an employee, contact us on 02 9199 4563 or at info@kinnylegal.com.


This blog post does not constitute legal advice and should not be relied upon as such. It is a general commentary on matters that may be of interest to you.  Formal legal or other professional advice should be sought before acting or relying on any matter arising from this communication.