Is your business’s independent contractor actually an employee?

How to find out whether your arrangements are compliant

As a business owner or manager, it can be tempting to consider and treat those working for you as “independent contractors” rather than employees.

But with the Australian Taxation Office and the Fair Work Ombudsman beginning to take a greater interest in this issue, it’s a good idea to check whether your existing arrangements pass muster.

Not only that, but it can be difficult to determine whether a casual employee should be considered a contractor or not.

In this news post, the MDL Employment Law team take a look at the crucial differences between a contractor and an employee, and show you what you need to do to make sure your business is compliant. 

How to determine if your contractor is in fact an employee

If a Court is asked to determine whether a contractor should actually be considered an employee, there are a number of factors that are taken into account. There’s no one indicator that will determine the actual status of a person’s employment.

Each determination is based on a work arrangement’s individual merits; and the Court will always look at the totality of the relationship between the parties. Some of the factors which will be considered are:

1) Is the person entitled to leave?

Let’s start with the basics. While an independent contractor doesn’t receive paid leave from their employer, an employee is of course entitled to receive paid leave.

That means a full time employee will qualify for annual leave, personal or carers’ leave, and long service leave; while casual employees receive a loading in lieu of leave entitlements.

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2) Does the person have a degree of control over how their work is performed?

Naturally, an employee of your business must work under your direction and control as their employer, on an ongoing basis.

By contrast, if the person has a high level of control in how their work is done, they may be considered a contractor.

3) What are the person’s hours of work?

While an employee will generally work standard or set hours, an independent contractor will decide what hours they’ll need to work to complete the specific task under their agreement.

You should also note the complicating factor that a casual employee’s hours may vary from week to week.

4) Is there an expectation of ongoing work?      

While an independent contractor is usually engaged by a business to complete a specific task, an employee will usually have an expectation of ongoing work.

Note though that some employees may be engaged for a specific task or specific period, so there can be some grey area in this consideration. 

5) Does the person bear an element of risk?      

While an employee bears no financial risk (which is the responsibility of their employer), an independent contractor bears the risk for making a profit or loss on each task they undertake.

Contractors also usually bear responsibility and liability for poor work or injury sustained while they perform their assigned task. As such, they will generally have their own insurance policy to manage this risk.

6) Does the business pay superannuation to the person?

Where an employee is entitled to have superannuation contributions paid into their nominated superannuation fund by their employer, an independent contractor is responsible for paying their own superannuation.

Be aware though that in some circumstances, independent contractors may be entitled to be paid superannuation contributions.

7) Who provides the necessary tools and equipment?

While an independent contractor is responsible for providing their own tools and equipment, an employer will generally provide an employee with the tools and equipment they need (or else provide a tool allowance). 

Note that alternative arrangements may be made within a contract for services.

8) Is the business responsible for paying the person’s tax?    

Where an employee has income tax deducted from their pay by their employer (the ‘PAYG’ system), an independent contractor is responsible for paying their own tax and GST to the ATO. 

9) How is the person paid by the business?

While obviously an employee is paid regularly (whether that’s weekly, fortnightly, or monthly) an independent contractor has an ABN, and will either submit an invoice for the work they complete, or be paid at the end of the contract or project. 

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What you need to know about “sham contracting”

It’s a sad fact that some employers do attempt to disguise an employment relationship as an independent contracting arrangement – usually in an attempt to avoid responsibility for employee entitlements such as annual leave. This is known as “sham contracting”. 

The sham contracting provisions of the Fair Work Act (sections 357 – 359) state that an employer must not:

  • Misrepresent an employment relationship or a proposed employment arrangement as an independent contracting arrangement;
  • Dismiss or threaten to dismiss an employee for the purpose of engaging them as an independent contractor;
  • Make a knowingly false statement to persuade or influence an employee to become an independent contractor.

Heavy penalties apply for businesses that breach the sham contracting provisions of the Fair Work Act – so if you currently engage independent contractors at your business, it pays to have an Employment Lawyer review your current contractual arrangements to double check their validity.

Find out whether your business’s employment arrangements are compliant

When reviewing your arrangements, think about the true nature of the relationship between you and your contractor to determine if the person may in fact be an employee – despite the best intentions of both you and your ‘contractor’. 

If you need assistance with reviewing your business’s current contractual arrangements, MDL’s Employment Law team are here to help.

To discuss your situation, contact McCarthy Durie Lawyers on 07 3370 5100 or fill out the contact form here.