The distinction between employees and contractors can be a grey area, and if you get the classification wrong it can expose your business to risk. We hope this blog provides you with a very basic starting point in determining whether your workers should be engaged as employees or contractors.
Contractor or employee?
A general rule which is useful to remember is that an employee must be a person. Engaging a company, trust or partnership to do work for your business will always be classified as a contractor arrangement, even if the people actually doing the work are the company directors, partners or employees of the contractor.
In contrast, certain types of workers, such as apprentices, will always be employees.
There are a range of differences in the employment structure of employees and independent contractors that can help to distinguish between the two forms engagement. A comprehensive table can be found on the Fair Work website, but some of these are:
| Expectation of works | Ongoing work expectation (although some employees may be engaged for a specific task or period of time) | Usually engaged only for a specific task, on a timeline |
| How work is performed | Under the direction and control of the employer on an ongoing basis | High level of control in when and how the work is done |
| Work hours | Usually has standard or set hours (this may differ for casual or part time employment) | Works under an agreement where the contractor retains autonomy over the hours worked to complete the specific task |
| Superannuation | Contributions are paid into a nominated fund by their employer | Contributions are paid by the individual (although in some circumstances this is different, so specific advice should always be obtained on this point) |
| Tools and equipment | Generally provided by the employer, or the employer provides an allowance for purchase | Provides their own tools and equipment unless alternate arrangements are made under the specific contract |
| Tax | Income tax is deducted by the employer | Pays own tax and GST to the ATO |
| Leave | Relevant leave entitlements such as annual leave, or loading in lieu of leave entitlements for casual employees | No paid leave |
In determining whether a worker is properly classified as an employee or a contractor, Courts will examine the totality of the relationship between the contracting parties to make their decision. Even if a contract describes someone a contractor, the nature of the employment can result in the worker being properly classified as an employee. The take-out should be – if in doubt, seek advice.
Consequences of getting the classification wrong
There are serious and expensive consequences for getting the employer/contractor classification wrong.
To provide an example, in the 2013 decision in ACE Insurance Limited v Trifunovski, the Full Federal Court determined that even though their contract explicitly stated the workers were independent contractors, the fact that the company retained control over the organisation of their work meant they were actually employees. As a result of this finding, the company was responsible to back-pay entitlements to annual leave, sick leave and long service leave totalling around $500,000.
This area of law is complex, and the test for whether a worker is an employee or contractor is different in a number of contexts. For example, the definition of an employee for tax and superannuation purposes is different to the definition for leave entitlement purposes.
How can I learn more?
David Wang.
Special Counsel.
David specialises in commercial and property law. He has extensive experience assisting clients with commercial transactions and negotiations, property acquisition & development, retail & commercial leasing, structuring investments & conducting legal due diligence, foreign investment related issues and trade marks.
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