Deciding whether or not an individual should be an ‘Employee’ of the Company or is rather a Contractor is a tricky one. Contracting emerged as an alternative to traditional employment relationships and is sometimes necessary, where a Company requires certain specialist skills that cannot be easily obtained by recruiting an employee. Alternatively, some individuals wish only to be engaged as Contractors, particularly where they can service multiple clients without any restrictions.

Businesses should be aware that simply calling an individual a ‘Contractor’ on paper, or the fact that they have an ABN or registered business name, does not mean that it is determinative of a Contractor relationship.

So what makes an individual an ‘Employee’ or a ‘Contractor’ at law, and how do the courts decide?

The table below outlines some of the factors that, taken together, determine whether an individual is an employee or contractor for tax and super purposes.

Feature Employee Contractor
Measure of Control exercised by Principal/Employer Employer usually has the right to control how, when and where a worker performs their duties. Contractor works at own initiative to achieve a stated result. Maintenance of discretion and flexibility as to how work is completed.
Exclusivity Employee usually only works exclusively for the Employer Contractor is free to provide services to multiple clients
Right to delegate Employee is personally engaged to perform the role and has no inherent right to delegate performance of the role to another employee, unless authorised by employer. Contractor may delegate all, or some, tasks to another person and may employ other persons to perform the services [may be subject to principal’s consent].
Hours of Work Employee has hours of work set by Employer. Contractor can set their own hours of work, as long as they perform the services.
Leave Entitlements Employee is entitled to annual leave, long service leave and sick leave, and this is usually provided for in written contract. Contractor is not entitled to leave, and a written contractor agreement would not usually provide for these things.
Payment Employee is generally paid for their time e.g. hourly, weekly, annual salary. Contract is generally paid for providing services.Contractor will usually issue tax invoice for work.
Part of the Business The work of the Employee is usually essential to the business carried on by the Employer.The Employee is working in the business of the Employer. Contractor carries on their own business, independently of the Employer and as distinct from the Employer’s business.

what it looks like when the business gets it wrong

Generally, the employment relationship is more heavily regulated than a contractor relationship. If a contractor is incorrectly classified as a Contractor, where at law they are in fact an employee, you will find that you are at risk of breaching the law. Examples of this in practice are set out below:

 

Freestone v Morris & Partners Pty Ltd [2009] AIRC 223

A woman sought compensation because she had not been given statutory notice of termination of her engagement with the Company. The Company claimed that the woman who performed office duties, including bookkeeping, was a contractor. The Company argued that the woman had no written contract, she issued invoices on a monthly basis via her registered name, and she operated various other businesses.

The Australian Industrial Relations Commission found that she was, in fact, a part-time employee. Some of the factors that influenced that decision were:

  1. She did not advertise her bookkeeping duties to the world at large or maintain separate business premises;
  2. She worked under the direction of one of the business owners;
  3. She did not provide or maintain significant tools or equipment;
  4. Her work could not be delegated or subcontracted; and
  5. She was remunerated for hours of work [not completion of tasks].

 

Fair Work Ombudsman v Metro Northern Enterprises Pty Ltd [2013] FCCA 216

Consultants were engaged by the Company to sell kitchenware products. The consultants would approach members of the public at public venues and invite them to enter a competition to win products. They then contacted the individuals and performed demonstrations of the products with a view of selling them. They signed contract calling them ‘independent agents’ which expressly stated that they were not employees. The Federal Circuit Court [FCCA] found them to be employees.

The FCCA said that their arrangement of work was not consistent with them being independent contractors, for example:

  1. The company exercised control over how they did their work, particularly the demonstrations;
  2. They were an integral part of the Company’s business;
  3. They could not delegate their work;
  4. They were not engaged for a result or a product, but for their labour in following the steps that would produce a result.

The Company was found liable under the sham contracting provisions of the Fair Work Act 2009 (Cth) and was liable for employee entitlements that should have been paid under the relevant modern award.

If you incorrectly classify an individual as a contractor, you could be liable for:

  1. Superannuation Charges – where you have failed to make superannuation contributions for the benefit of the individual either because they are an employee at common law or because they are an ‘employee’ under the extended definition of the Superannuation Guarantee (Administration) Act 1992 (Cth)
  2. Additional Payroll Tax – including penalties and interest, where you have incorrectly claimed contractor exemption on payments made to common law employees (for which no exemptions apply)
  3. Back Pay under Modern Award –Most non-management employees are covered by a modern award and will have entitlements under the award to a minimum wage, overtime, penalty rates, allowances and leave loading. Besides liability for back pay, there are penalties for breaching modern awards.
  4. Unpaid Annual Leave and Long Service Leave –All employees are entitled to paid annual leave and may be entitled to long service leave upon reaching the required number of years’ service.
  5. Compensation for unfair dismissal – many employees have access to an unfair dismissal regime, and to other remedies where their employer acts to the detriment of the employee.
  6. If you need us to review any Employment or Contractor Arrangements you have in place to make sure they align with the common law., contact the team at businessDEPOT Legal.