Businesses should have systems in place to ensure that the correct determination is made as to whether a worker should be classified as an employee or as an independent contractor. This is important as tax, superannuation and other obligations will apply depending on whether the worker is classified as an employee or as an independent contractor.
An employee will generally have PAYG withholding, superannuation and fringe benefits taxes payable by the employer. Independent contractors, however, will generally be responsible for their own superannuation and tax obligations.
If the classification of your worker is wrong and as a result, you fail to meet your obligations in respect to that worker, you risk having to pay penalties and charges.
What needs to be considered?
A number of factors need to be considered which will help determine whether your worker should be classed as an employee or an independent contractor.
No single factor will determine if your worker is an independent contractor or an employee, and you need to look at the whole working arrangement.
A worker isn’t automatically a contractor just because they have an ABN or specialist skills or you only need them during busy/seasonal periods.
The whole relationship between the parties will be considered when determining the status of your worker’s employment.
| Indicator | Employee | Independent Contractor |
| The 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 of 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. |
A simple way to help tell the difference
The Australian Taxation Office provides the following simple explanations on its website as to the differences between an employee and an independent contractor:
- Employees work in your business and are part of your business.
- Contractors run their own business and provide services to your business.
Why is the distinction important?
Employees and their relationship with you, the employer, are regulated by specific employment protection laws and various awards and workplace agreements. These laws usually provide a higher degree of protection to an employee than the general commercial laws that regulate the relationship between you and an independent contractor.
This legislated employee protection includes minimum conditions and standards of employment for employees, including minimum entitlements for wages, leave, termination and redundancy.
Adopt good business processes
Business owners should ensure they keep adequate records which reflect the reasoning as to whether a worker is an employee or contractor and the factors on which they relied upon when making that determination.
Most of this information can be found in a service contract for independent contractors or an employment contract for employees. Such contracts should accurately reflect the actual conditions of the working arrangement between the parties.
All contracts, regardless of whether they are service contracts or employment contracts, should:
- be in writing
- specify whether it is a contract for services or an employment contract (as the case may be);
- set out the period of engagement and the remuneration;
- include dispute resolution provisions; and
- specify how the relationship can be terminated, and the procedure to do so.
Penalties
It is illegal for an employer to misrepresent an employment relationship or a proposed employment arrangement as an independent contracting arrangement or make a knowingly false statement to persuade or influence an employee to become an independent contractor.
Under the Fair Work Act inspectors can:
- impose penalties for contraventions of sham contracting arrangements; and
- apply to the courts for an injunction or an interim injunction if an employer seeks (or threatens) to dismiss an employee for the purpose of later engaging them as an independent contractor. The purpose of the injunction would be to prevent the dismissal from occurring, or otherwise remedy the effects. Courts can also make various other orders to have the employee reinstated or compensated if the employee requests so.
If you need more information or if you need assistance or advice on how to proceed please call us on (08) 9335 9877 or complete the form below to request an Introductory Consultation.
