Understanding the difference between an independent contractor and an employee is a problematic area of employment and related laws.
The official business.gov.au website defines independent contractors as their own bosses, so they work for themselves. Meanwhile, employees work in your business, and you pay them a wage and control how, where and when they do their work for you.
What’s in a title?
Your business can hire a contractor directly as an individual through a labour hire agency, trust, partnership, or company. Such workers may have specialist skills you need, but they prefer a contract arrangement, particularly if they have other clients.
Sounds simple, but there’s much more to it, according to the Australian Tax Office. Businesses can’t avoid obligations and liabilities under the law, just because they consider a worker an independent contractor rather than an employee. Your business must still uphold its obligations regarding payroll tax, PAYG withholding tax, superannuation, and workers’ compensation.
A ‘contractor’ could actually be an employee even if they have:
- An Australian Business Number (ABN)
- Registered business name
- A contract with you
- They call themselves a contractor.
Determining if you have an employee or contractor
To determine if you have an employee or contractor, apply the common-law test. It relies on several factors you need to identify to work out how the law would apply regarding the working relationship. Courts have considered factors such as:
- How much control the principal/employer has over how, when, and where the work is undertaken
- Whether the staffer works exclusively for you or multiple clients
- If the worker has the choice to delegate or subcontract the work to others
- Who has the responsibility to rectify poor work, mistakes and bear the commercial risks of loss that results
- Whether your business gives them tools and equipment for the work
- Who sets the work hours
- If the worker is entitled to paid leave
- How payment is made, such as for their time or their services/project work, and if tax invoices are involved.
This checklist from CPA Australia gives more guidance. Keep in mind, a worker is defined differently in different states.
Contractor rights and protections
Under the Fair Work Act 2009, contractors have workplace rights and protections. Both the contractor and proposed contractor have protection from coercion, adverse action, and abuses of freedom of association if they engage in industrial activities or exercise a workplace right.
Recent case example
In a recent case, the Fair Work Commission found an Uber driver was an independent contractor, not an employee. The commission relied on these factors for its judgment, saying the driver:
- Chose when to log on/off from the Uber app
- Controlled the hours and locations he wanted to work
- Could accept or refuse trip requests
- Supplied his own tools, i.e., car and mobile phone
- Was paid after completing his trips rather than earning a salary
- Had an ABN and was registered to collect GST, so there was no evidence of Uber deducted PAYG tax
- Uber didn’t stop him from working for others.
This recent High Court decision goes into more detail. The judge diverged from the usually ‘holistic’ assessment approach to focus more on the contract terms between the parties. If you’d prefer to listen to a podcast on the issue, here’s one that covers that case and a couple of others.
Workers’ compensation requirements
To recap, the law tends to regard your pseudo contractors as employees, so your business must take out workers’ compensation to cover them for work-related injuries, illnesses, and fatalities. However, your contractors or self-employed staff will need to take out their own insurance cover. If you hire sub-contractors, be clear about whether they are employees or contractors – if so, you’ll need to work out if they should be covered by your workers’ compensation policy. Look to the dollar amount of cover and policy exclusions, too.
This article is a guide, not legal advice, as your business circumstances are unique. We can discuss your risk profile and appetite with you and use that to customise recommendations for insurance cover.