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Employees and Independent Contractors

An employee is someone who performs work under a contract of employment.

Identifying who is, or is not, an employee has become an increasingly disputed area, with a number of different factors to be considered.

Non-employees may be 'independent contractors' or 'sub-contractors' and are employed under a contract for services or even as agents representing a client business.

The legal consequences of being an independent contractor are significantly different to those for employees. Only an 'employee' can be covered by an award or make a workplace agreement. However, some cleaners, outworkers and some drivers of public passenger vehicles who might ordinarily be considered independent contractors are deemed to be employees under the Fair Work Act 1994 (SA) [ss 4, 5], see also Fair Work Act 2009 (Cth) various references to rights of outworkers [for example ss 30F, 47 - 48].

The rights and obligations of employees are very different to those who are self-employed. To distinguish between employees and independent contractors, the courts take into account a number of factors to determine what is the real nature of a particular work relationship. These factors may include the following:

  • Control over work - generally an employee works as directed by the employer whereas a contractor has a greater say in how the work is to be done.
  • Payment - employees are usually paid on the basis of an hourly rate or a salary. Contractors are more often paid for a required result, with less regard for time. Contractors send invoices for their services.
  • Work injury - contractors are responsible to insure themselves against injury but employees are not.
  • Risk — employees generally do not bear in an immediate or direct way the risk of financial loss incurred by the business for which they work. Contractors have a chance of profit, and also the risk of loss.
  • Sub-contracting - an employee cannot can assign or delegate (sub-contract) the work to others whereas a contractor is typically permitted to do so.
  • Tools and equipment - contractors may supply special equipment or tools to do the job and generally supply their own rather than using others. They also do not usually wear the uniform of another organisation.
  • Income tax and superannuation - employers usually pay these for their employees whereas contractors make their own arrangements.

What is most important is that the law will uphold the true nature of a work relationship despite any attempts to make what is really an employer/employee relationship appear to be something else. It is does not matter what label the parties give it, the court goes past that and examines what the relationship really is. The courts look at the totality of the relationship to determine whether the worker is an employee or contractor [Hollis v Vabu Pty Ltd (t/as Crisis Couriers) (2001) 207 CLR 21].

Sometimes an employer may attempt to incorrectly describe the true nature of a relationship so as to avoid responsibilities under various statutes and awards, but the Parliament and courts are wise to this. The Independent Contractors Act 2006 (Cth) and the Workplace Relations Amendment (Independent Contractors) Act 2006 (Cth) came into effect on 1 March 2007 and apply to all independent contractor arrangements which involve a constitutional corporation (that is a foreign, financial or trading corporation), the Commonwealth or a Territory. These Acts impose penalties on businesses that use ‘sham arrangements’ to either disguise employees as independent contractors or coerce employees into independent contracting arrangements.

Under the Fair Work Act 2009 (Cth) an employer must not misrepresent an employement relationship as an independent contract (sham contracting) [s 357] , must not dismiss an employee to engage them as an independent contractor [s 358] and must not make a false statement to encourage someone to be engaged as an independent contractor [s 359].

The Australian Tax Office has an online decision tool to help businesses to understand whether individual workers are employees or contractors for the purposes of tax and superannuation.

See also the Fair Work Ombudsman's website on sham contracting.

Employees and Independent Contractors  :  Last Revised: Wed Oct 26th 2016
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.