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The Difference Between Contractor and Employee

Legally, whether someone is classified as an employee or an independent contractor is vastly different. If a person is an employee rather than an independent contractor, they will be covered by the Fair Work regime including unfair dismissal laws and other entitlements under the Fair Work Act 2009. Independent contractors are not covered.

The Key Differences

The Fair Work Ombudsman has prepared the following table, which outlines the key differences between an employee and an independent contractor.

Indicator
Employee
Independent Contractor
Degree of control over how work is performed Performs work, under the direction and control of their employer, on an ongoing basis. Has a high level of control in how the work is done
Hours of work Generally works standard or set hours (note: a casual employee’s hours may vary from week to week). Under agreement, decides what hours to work to complete the specific task.
Expectation of work Usually has an ongoing expectation of work (note: some employees may be engaged for a specific task or specific period). Usually engaged for a specific task.
Risk Bears no financial risk (this is the responsibility of their employer). Bears the risk for making a profit or loss on each task. Usually bears responsibility and liability for poor work or injury sustained while performing the task. As such, contractors generally have their own insurance policy.
Superannuation Entitled to have superannuation contributions paid into a nominated superannuation fund by their employer. Pays their own superannuation (note: in some circumstances independent contractors may be entitled to be paid superannuation contributions).
Tools and equipment Tools and equipment are generally provided by the employer, or a tool allowance is provided. Uses their own tools and equipment (note: alternative arrangements may be made within a contract for services).
Tax Has income tax deducted by their employer. Pays their own tax and GST to the Australian Taxation Office.
Method of payment Paid regularly (for example weekly/fortnightly/monthly). Has obtained an ABN and submits an invoice for work completed or is paid at the end of the contract or project.
Leave Entitled to receive paid leave (for example, annual leave, personal/carers’ leave, long service leave) or receive a loading in lieu of leave entitlements in the case of casual employees. Does not receive paid leave.

How the Court Determines Between Contractor and Employee

The courts have developed a multi-factorial approach to determining whether a person is an employee or an independent contractor.

In one case the plaintiff was engaged as a Sales Agent under a Sales Agent Agreement by a real estate agency. The issue was whether he was an employee or an independent contractor, in light of the nature of his work, including:

  • Selling the product offered by the Real Estate Agency (houses)
  • Phone calls from the real estate agency were forwarded to the Plaintiff’s mobile
  • The plaintiff had a business card and an email address from the real estate agency and was required to attend sales and training meetings.
  • There was no evidence of substantial work being performed by the plaintiff outside the work performed for the real estate agency
  • The contract signed by the plaintiff stated the sales agent ‘must not act for any other builder or marketing body in the residential home building industry’.
  • The plaintiff was not required to wear real estate agency’s polo shirts, but received some anyway.
  • No income tax or superannuation was paid by the real estate agency to the plaintiff.
  • The plaintiff was not provided with any paid leave.
The Fair Work Commission’s Conclusion

The Fair Work Commission concluded that the Plaintiff was an employee, taking into account his place of work , the type of work undertaken, the business cards and email address, that the real estate agency’s office phone was redirected to Mr Gardiner’s mobile phone and the limitations on the plaintiff performing work for others. These factors, taken as a whole, paint a strong picture of an employee/employer relationship.

Hence, the courts will take into account all kinds of factors when determining whether a relationship is one of an employee/employer or an independent contractor, and will look at them as a whole .

Reviewing Relationships

If you are an employer, it is definitely worth reviewing your relationships and making sure that you have not wrongly treated an employee as an independent contractor. Otherwise, penalties may apply or claims may be raised in relation to wages, paid leave and other entitlements. Also, the terminology in a contract will not define the relationship, as the courts look at the substance of the relationship.

If you are employed by someone or a company, make sure you are not being mistreated as an independent contractor when you are in fact an employee. Particularly in this age where companies, such as Uber, are growing and the lines between an employee and an independent contractor are getting blurrier, it is essential to undertake a review.

Please if you need advice regarding your employment relationships on (02) 9963 9800 or at .au.