Independent Contractor or Employee – what is the difference?

The Federal Court recently ruled that two truck drivers that had been engaged as ‘contractors’ of a warehousing company for about 40 years, were actually ‘employees’.

The Federal Court, in the case of Jamsek v ZG Operations Australia Pty Ltd [2020], considered various aspects of the working relationship before concluding the nature of the relationship was that of an ’employer’ and ’employee’. The company was then ordered to provide these truck drivers a significant sum of leave and superannuation entitlements.

Such a decision has raised questions among many of our clients as to what exactly is the difference between an independent contractor and an employee, and how to avoid mis-classification or ‘sham-contracting’.

Within this article we have summarise what you’ll need to know to ensure you’re not sham contracting, including:

• what an independent contractor does;
• how an independent contractor differs from an employee; and
• generally the best way to identify if your workers are contractors and, if so, how to ensure they are recognised as contractors and paid accordingly.

For specific information regarding your minimum legal obligations, or for drafting a contract, contact us for specialist advice

WHAT IS AN INDEPENDENT CONTRACTOR?

Independent contractors are individuals who run their own business. They usually negotiate their own fees/working arrangements for specific jobs or projects under a ‘contract for service’, and can work for more than one client at a time. Independent contractors are often called contractors or sub-contractors (‘subbies’).

A contractor should have their own Australian Business Number (“ABN”) or possibly an even greater level of registration/legal status (eg Australian Company Number (“ACN”)). As the “representative” or “principal” of the company they have set up/work for, they perform the contracted work on behalf of the business entity.

A contractor relationship differs fundamentally from an employment relationship. Contractors are free to work with as many clients as they like whenever they like, and can delegate any work they have to other workers (even other sub-contractors).

Employees, on the other hand, are subject to the rigid ‘control’ that employers are able to exercise over their employees (especially full-time employees) as well as the duty of fidelity which exists in an employment contract relationship and the ‘control’ which is exerted post-employment through post-employment ‘restraints of trade’.

HOW DO I TELL IF A WORKER IS AN EMPLOYEE OR AN INDEPENDENT CONTRACTOR?

An increasing range of work formerly performed under employment agreements is now performed under contracts for services, as a result of the increased deregulation of the labour market. This is only likely to be enhanced with the recent trend toward what is being called the ‘gig economy’, that is, a fluid, nimble work environment in which temporary positions are common and organisations contract with independent workers for shirt-term engagements (gigs) in increasingly higher volumes.

It is important to know whether a worker is an employee because there are numerous rights, benefits and obligations which flow, in law, from an employer-employee relationship. Whilst there is no single indicator that determines if a person is a contractor or an employee, there are a number of factors that contribute to determining who is an employee and who is a contractor. These factors include:

• The degree of control over how work is performed – an employee performs work, on an ongoing basis, under the direction and control of their employer whereas a contractor has a high level of control in how the work is done.
• Hours of work – an employee generally works standard or set hours whereas a contractor decides what hours to work in order to complete the specific task or job.
• Expectation of work – an employee usually has an ongoing expectation of work (although note: some employees may be engaged for a specific task or specific period) whereas a contractor is usually engaged for a specific task/project.
• Risk – an employee bears no financial risk (this is the responsibility of their employer) whereas a contractor bears the risk for making a profit or loss on each task. For example, the contractor bears responsibility and liability for poor work or any injury sustained while performing the task. As such, contractors generally have their own insurance policy. 
• Superannuation – an employee is entitled to have superannuation contributions paid into a nominated superannuation fund by their employer whereas a contractor pays their own superannuation. There are exceptions to this, such as when a contractor is hired wholly or principally for labour – in this case, the contractor is considered an employee for superannuation purposes, and the person that hired them is responsible for paying their superannuation. For more information on superannuation for contractors see here.
• Tools and equipment – for an employee, tools and equipment are generally provided by or paid for by, the employer whereas a contractor uses their own tools and equipment.
• Tax – for an employee, income tax is deducted by their employer whereas a contractor pays their own tax and GST to the Australian Taxation Office.
• Method of payment – an employee is paid regularly (for example, weekly/fortnightly/monthly) whereas a contractor submits an invoice for work completed or is paid at the end of the contract/project.
• Leave – an employee is entitled to receive paid leave (for example, annual leave, personal/carers’ leave, long service leave) whereas a contractor does not receive paid leave.

See the Checklist we have prepared at the end of the How-To Guide here for a summary of the key things to consider.

SHAM CONTRACTING

Employers sometimes try to create a ‘contracting’ agreement with their employees to receive numerous perceived benefits such as not needing to pay payroll tax, superannuation contributions and workers’ compensation. Employees may also ask for a contracting agreement in order to minimise their tax or receive other perceived benefits.

However, under the Fair Work Act 2009 (“FW Act”), it is illegal to claim someone is a contractor when they are actually working as an employee. For example, requiring employees to get an ABN and submit invoices. It is also illegal to dismiss, or threaten to dismiss, an employee if they don’t become a contractor, or dismiss an employee and then hire them as a contractor to do substantially the same work. This is called ‘sham contracting’. Sham contracting can be done intentionally or unintentionally by an employer.

Given the individual worker entering into a sham contracting arrangement has fewer rights as a contractor compared to an employee (for example, they can’t bring unfair dismissal claims), regulators (as well as trade unions) regularly perform audits and inspections to ensure workers who have classified themselves as contractors (or employers who have classified their workers as such) are not engaging in sham contracting.

If prosecuted, employers face civil penalties of up to $33,000 per sham contracting offence, and persons entering into sham contracting arrangements may also be held personally accountable if they have aided and abetted the breach. Those individuals will be liable for a civil penalty of up to $6,000 per offence.

A defence to the FW Act’s ‘sham contracting’ provisions is to show that, at the time an employer made a representation about a person being a contractor or entered into a contractor arrangement, they “did not know” and “were not reckless” as to whether the contract was an employment contract as opposed to a contractor’s contract for services.

HOW DO I PROTECT MY BUSINESS USING CONTRACTORS?

If you use contractors, we recommend you consider:

• Record both your employee and contractor agreements in writing. In particular, take steps to show that an independent contractor have been engaged and will be paid as such as well as the fact that the contractor’s terms and conditions will vary from your employees’ terms and conditions. Have the contractor sign an acknowledgement that they understand and agree (accept) they are a contractor and not an employee.
• Review your independent contractor arrangements. If, over time, the relationship has altered (i.e. a contractor now receive a ‘steady’ stream of work for you and work each week, it is expected they will not refuse jobs you give them and/or they now wear your uniform in front of clients), consider engaging the contractors as employees or review the way in which their work is carried out (i.e. to clearly establish an independent contractor relationship still exists).
• Take steps to implement the independent contractor’s ‘contract for services’ and regularly update it for contractors who are repeatedly engaged;
• Ensure independent contractors you engage have some degree of flexibility/autonomy in performing their work; and
• Keep notes of any negotiations that occur whilst entering into ‘contracts for services’ to demonstrate the true nature of the employment relationship and the parties’ intentions.

CAN WE HELP?

If this article raises questions about your specific employees, please reach out and speak to our director Mark Ritchie on 0458 644 469. We’d be happy to help you implement some of the advice above in your specific work situation.