Understanding the difference between employees and independent contractors is very important. The difference will affect, among other things, taxation consequences, payroll tax liability, and which party has the legal liability with respect to third parties.
Australian industrial relations law is nearly always concerned with the employer-employee relationship. The legal distinction at common law between an employee and an independent contractor is therefore very important and may have significant legal and practical consequences. Some examples include the following:
- taxation consequences;
- payroll tax liability;
- the worker may act on behalf of the employer as a principal, so as to create a legal liability with respect to third parties;
- the worker is entitled to the benefits of employment law, such as wages, leave entitlements and the protection afforded by both the common law and statutes against wrongful or unfair dismissal; and
- workers compensation liability.
Employees v independent contractors
It can often be difficult to determine whether an individual has been engaged to work as an employee or an independent contractor. Some contracts may explicitly state the basis on which an individual has been engaged but these clauses are not definitive, ie it is possible for a worker to be an employee even though their contract describes them as an “independent contractor”. Therefore, it is necessary to look at the substance of the relationship to determine if the individual is engaged as an employee or an independent contractor.
The evaluation of an employment arrangement is a question of degree, as there is no single conclusive measure. However, there are some key indicators that may assist in determining whether a worker is an employee or independent contractor.
One relevant factor is whether the individual can be said to be operating their own business (independent contractor) or whether they are actually employed by another business (employee).
Other factors that have been applied to determine whether an individual is an employee or an independent contractor include the following:
- Control – the greater the level of control an employer has over the work tasks of an individual worker, the more likely it is that they are an employee.
- Ability to sub-contract or delegate – if an employer retains the right to sub-delegate work tasks, this may indicate that the worker is an employee.
- Basis of payment – if payment is based on the time worked, this may indicate that the worker is an employee.
- Equipment and tools – if the employer provides all or most of the tools and equipment required for performing the work duties, this may indicate that the worker is an employee.
- Commercial risk – If the employer bears the commercial risk for all work tasks, this may indicate that the worker is an employee.
Note: If the converse applies in any of the situations described above, this may indicate that the worker is an independent contractor.
It is important to note that no single factor will be determinative; the entire arrangement should be considered.
Table: factors to consider
The following table lists more specific factors that a court may consider in determining the nature of the relationship and whether the contract is a contract of service (employee) or a contract for services (independent contractor).
| Factor | Employee | Independent contractor |
| Written agreement | Relates to the employee | Relates to the task to be performed |
| Basis of hiring | Hired on a continuous basis | Hired for a specific task |
| Equipment and materials | Provided by the employer | Provided by the independent contractor |
| Electricity and floor space | Provided by the employer | Provided by the independent contractor |
| Manner of performance (right to control) | Employer has the right to direct the manner of work performance | The independent contractor generally has freedom to manage the way the task is performed |
| Place of performance | Employer’s place of business | Place specified in contract – it may be at a place other than the hirer’s place of business |
| Timeframe for completion of work | Determined by the employer | Determined by the timeframe set in the contract |
| Right to delegate | Task is usually performed personally by the employee, although some delegation may occur | The independent contractor can delegate tasks to other persons freely |
| Monthly or annual payment | Payment calculated on hourly, daily, weekly, monthly or annual basis, in accordance with the contract of employment or award and on a regular basis | Payment is by way of agreed sum for the task performed, at a specified time, usually on receipt of invoices |
| Leave and other entitlements | Entitled to leave and holiday payment | No leave or additional entitlements |
| Integration in business | Employee’s tasks are an integral part of the business | Tasks of independent contractor are not integrated in the business but are an accessory to it |
| Other employment | Employee is usually not able to freely enter into other employment while employed | Independent contractor can accept work from others |
| Description and actions of the parties | The actions of the parties are consistent with an employer-employee relationship, regardless of the description contained in the contract of employment | The description in the contract and the parties’ actions both indicate an independent relationship |
In addition, other legislation throughout Australia impacts on the definition of employer-employee and independent contractor.
The Independent Contractors Act 2006
On 1 March 2007, the independent contractor laws came into effect, giving independent contractors greater flexibility in running businesses. The independent contractor laws:
- stopped state laws from requiring independent contractors to be treated as if they were employees;
- established a three-year “transitional” period during which existing state laws could still apply to existing contracts. The transitional period ended on 1 March 2010;
- replaced unfair contracts laws in New South Wales and Queensland;
- made it illegal for an employer to disguise an employment relationship as an independent contracting arrangement; and
- made it illegal for employers to threaten or mislead employees to get them to change their status to independent contractors.
The independent contractor laws do not affect:
- state laws that protect textile, clothing and footwear outworkers; or
- New South Wales and Victorian laws that deal with owner-drivers.
Under the Independent Contractors Act 2006 (the ICA), the parties to an independent contractor arrangement can apply for their contracts to be reviewed on the grounds that they are unfair or harsh. The fairness of the contract depends on the relative bargaining strength of the parties and on any undue influence or pressure that has been imposed on a party to the contract.
In Fabsert Pty Ltd v ABB Warehousing (NSW) Pty Ltd [2008] FMCA 1198, the Federal Magistrates Court held there was a breach of contract under the ICA where a claim for “reasonable notice of termination” was not given to the contractors.
Fabsert had agreed to provide warehousing management services to ABB under a contract of services. The contract failed to expressly address the issue of termination and, two years later, ABB terminated the contract without notice. Fabsert took legal action against ABB on the grounds that the contract was unfair and harsh and that Fabsert was in a weaker bargaining position when the contract was negotiated.
ABB was ordered to pay a compensation sum for the 12-week notice period that should have been in the contract.
This article was extracted from Thomson Reuters’ Company Director Manual.