Independent Contractor or Employee?

By 16 January 2018Business, Workplace
Independent Contractor or Employee

A business should be cautious about labelling a worker as an independent contractor without properly considering the legal aspect of that type of work relationship.

While it is often difficult to determine whether a worker is an employee or an independent contractor, the severe consequences for getting it wrong mean you should treat this as a priority issue.

It is illegal for an employer to:

  • misrepresent an employment relationship, or employment offer, as an independent contracting arrangement;
  • dismiss, or threaten to dismiss, an employee with the main purpose of re-hiring that person as an independent contractor to do substantially the same work; and
  • knowingly make false statements to a current or former employee to persuade that person to become an independent contractor to do substantially the same work.

Each of these actions will breach civil remedy provisions of the Fair Work Act 2009 (Act) and expose an employer to significant fines. Currently the maximum fine is $63,000 for a company, and $12,600 for an individual involved.

For employment law purposes, the courts have developed a number of indicia to determine whether a worker is an employee or independent contractor.

The two main tests for determining whether a worker is an employee or contractor are:

  1. Control – whether the payer controls what the worker does and how it is done, or whether the worker has the ability to refuse work, engage others to assist with that work or delegate it; and
  1. Relationship to business – whether the worker is:
  • operating their own business and being held out to the world as such = contractor; or
  • an important part of the employer’s business = employee.

The following table considers other relevant indicia. While not all indicia have equal weight, it may provide a starting point for considering the type of work relationship. In the end, it is important the payer decide how they want to structure the work relationship, which will involve accepting some risk.

IndiciaEmployeeContractor
Control – lawful authority to direct the way work is doneContract of service provides the payer with lawful authority to command the way work is doneContract for services is for a given result, the contractor works on his own account to achieve that result
Control – how work is performedTasks performed at request of employerContract entered into for specific tasks or a series of tasks. Contractor retains high level of discretion and flexibility as to how the work is to be performed
Risk Employee bears little or no commercial risk. Generally employer is responsible for any loss resulting from poor workContractor bears commercial risk and liability for any poor work or injury sustained in performing tasks. Generally has own insurance policy.
Place of performanceGenerally work performed on payer’s premisesGenerally services provided at more than one location
Hours of workGenerally standard hoursGenerally sets own hours to get the job done
Leave entitlementsContract will generally provide for annual leave, long service leave, sick leave and other benefits and allowancesGenerally no provisions for leave
PaymentGenerally an hourly rate, piece rate or award ratePayment based on performance of contract
Expenses Generally reimbursed for expenses incurred in the course of employmentResponsible for own expenses
AppointmentGenerally recruited through an advertisement by the employerLikely to advertise services to the public at large
TerminationEmployer reserves the right to dismiss an employee at any time (subject to any applicable laws)Payer may only terminate the contract without penalty where the worker has fulfilled the conditions of the contract. The contract usually contains terms dealing with defaults by either party
DelegationNo inherent right to delegate tasks to another. However, there may be power to delegate some duties to other employeesMay delegate some or all of the tasks to another person and may employ other persons
EquipmentEmployer generally provides plant and equipmentContract usually specifies who will provide the plant and equipment. Usually Contractor is responsible
Relationship to businessUsually integral part of the Employer’s businessUsually an accessory to the business
Ability to accept other workFull-time employee is usually restricted to work for one employer during normal business hoursCan accept as many contracts as they wish
Right to refuseNo right to continually refuse a reasonable taskUsually agrees to tasks beforehand. Contract governs tasks to be performed

The above information is of a general nature only. Please contact us if you require assistance to determine and establish an appropriate structure for a work relationship.

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