What are the key differences between an employee and a contractor?
The Fair Work Act, the Australian Taxation Office and other legislation places controls on the engagement of both contractors and employees.
To correctly determine whether a worker is an employee or contractor, the whole working arrangement needs to be examined. For example, a worker is not automatically a contractor just because they have an ABN or specialist skills or you only need them during busy periods.
Here are some common indicators that may contribute to determining whether a person is an employee or an independent contractor:
Some laws apply to both the employment and independent contract relationships
Often there is confusion (or incorrect assumption) in regards to what laws apply to employees and or contractors. It is important to understand that there is legislation that apply to both.
A relationship of employment gives rise to several obligations for an employer, including yet not limited to:
- the Fair Work Act 2009 (Cth) - this is the major employment legislation that covers most employees (excepting for some state government employees covered under relevant state employment legislation);
- workers compensation insurance to cover injury to workers;
- compliance with work, health and safety laws;
- long service leave, annual leave and parental leave;
- compliance with unfair, unlawful dismissal and adverse action laws;
- compliance with Federal Modern and State Awards;
- payment of PAYE/income tax, payroll tax, fringe benefits and superannuation; and
- compliance with anti-discrimination and anti-bullying laws.
The independent contractor relationship is typically governed by the contract between the organisation and the independent contractor and is not covered by employment laws.
Independent contractors need to manage their own business and typically procure their own insurance for potential negligence and also income protection.
In the past, independent contractors were in the spotlight with the potential for exploitation and unfair contracts. This resulted in the introduction of the Independent Contractors Act 2006 (Cth). This is subsequently supplemented further by the sham contracting provisions in the Fair Work Act 2009(Cth).
Laws that relate to both Employees and Contractors
The following relate to both Employees and Contractors. For example, yet not limited to:
- work, health and safety;
- adverse action claims
- workers compensation (in some cases); and
- superannuation (in some cases)
What are sham contracts?
Sham contracting arrangements happen where an employer attempts to disguise an employment relationship as an independent contracting arrangement. This is usually done for the purposes of avoiding responsibility for employee entitlements.
The Fair Work Act contains sham contracting provisions and employers cannot:
- 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 knowingly false statements to encourage or influence an employee to become an independent contractor.
Risks: what if you get it wrong?
Organisations must take steps to become aware of the differences between an employment relationship and an independent contractor relationship. Failing to do so risks exposure to sham contracting and other breaches.
The employment relationship is more heavily regulated than a contractor relationship. This often results in breaching laws by incorrectly classifying an individual as a contractor when at law they are in fact an employee.
If you incorrectly classify an individual as an employee or contractor, you may be liable for:
- 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 in the Superannuation Guarantee (Administration) Act 1992 (Cth).
- additional payroll tax (including penalties and interest) where you have incorrectly claimed contractor exemptions on payments made to employees (for which there are no exemptions available).
- back pay under a modern award or even an enterprise agreement, where you have incorrectly classified an individual as a contractor. 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. As well as liability for back pay, there are penalties for breaching modern awards.
- unpaid annual and long service leave, where you have incorrectly classified an individual as a contractor. All employees are entitled to paid annual leave, and may be entitled to long service leave upon reaching the required number of years’ service.
- compensation for unfair dismissal or for other prohibited conduct. Many employees have access to an unfair dismissal regime, and to other remedies where their employer acts to the detriment of the employee. For example, under the Fair Work Act 2009 (Cth), an employer must not take adverse action against an employee because the employee makes a complaint about safety matters affecting the employee’s employment.
- Fair Work Ombudsman Penalties: Fair Work Inspectors can seek the imposition of penalties for contraventions of sham contracting arrangements. The courts may impose a maximum penalty of $51,000 per contravention.
Case study from the Federal Court
Metro Northern Enterprises engaged consultants to sell kitchenware products claimed that the consultants were contractors. The consultants would approach members of the public at public venues, such as shopping centres, and invite them to enter a competition where they could win products.
The consultants then contacted the individuals and performed demonstrations of the products with a view to selling them. The consultants had signed contracts calling them ‘independent agents’ expressly stating they were not employees.
The Fair Work Ombudsman took legal action against Metro Northern Enterprises in the Federal Circuit Court which found them to be employees as their arrangement of work was not consistent with them being independent contractors.
For example, the company exercised control in a broad sense over the manner in which they did their work. The consultants had little independent control over how they did their work, particularly the demonstrations and when they could perform these duties. They were an integral part of the company’s business and were unable to delegate their work. They were not engaged for attain a result or a product; they were engaged for their labour in following the steps that would produce a result, clear description of an employee.
The company was liable under the sham contracting provisions of the Fair Work Act 2009 (Cth) and was also liable for employee entitlements that should have been paid to the “consultants” under the relevant modern award.
It is important that when an organisation is engaging workers that consideration is given to the appropriate method of engagement ie: employee or contractor. As indicated in this article, there are many factors to consider. Managing this process correctly will assist to mitigating potential risk to the business and also shows consideration to ensuring the individual being engaged is being on-boarded under the appropriate terms and conditions.
Needing advice and help?
If you would like assistance with dealing with the engagement of contractors and employees and ensuring the correct arrangements are put in place, the team of advisors at AB Phillips can assist you with practical advice and support.
Please contact AB Phillips, Monday to Friday between 9:00 am and 5:00 pm AEST by phone on 1300 208 828 or by email firstname.lastname@example.org
Please note that the above information is provided as comment and should not be relied on as a substitute for detailed professional advice or professional legal or financial advice on any particular matter. Where you would like additional information and support about the content in this document please contact hranywhere.