By Sanchit Paul
Introduction
When it comes to engaging with workers, distinguishing between employees and contractors is of vital importance in Australia. The classification determines various legal rights, obligations, and entitlements that individuals may have under the law. These include but are not limited to superannuation, paid leave, long service recognition, allowances for travel, meals, etc.
Defining Employees and Contractors
An employee is an individual who works under a contract of service, where the employer exercises control over the work performed and how it is done. On the other hand, a contractor, often referred to as an independent contractor, is engaged under a contract for service and is generally free to perform the work in their own way.
It is fair to ask why the distinction between the two is important. Often it can be unclear to a person working in a job or with a business if they are an employee or contractor. The role and scope of work are not always clearly defined in the workforce. There are several instances where individuals undertake work roles without a written employment contract or under the sole verbal promise of agreeing to work as a contractor for a company. In the absence of a clearly defined contractor or employment agreement, the legal employee test is useful.
Legal Position
The 2022 High Court case of Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1 is the primary authority for ascertaining the classification of workers.
When one does not enter a formal written contract, the court values performing ‘a multifactorial balancing exercise whereby the history of all the dealings between the parties is to be exhaustively reviewed’.[1] The abovementioned case and other older authorities such as Stevens v Brodribb Sawmilling Co Pty Ltd (1986) 160 CLR 16 and Hollis v Vabu Pty Ltd (2001) 207 CLR 21 provide useful guiding criteria to determine employee status.
The court emphasises a consideration of the ‘totality of the relationship between the parties’. The Australian Taxation Authority provides a convenient table here summarising relevant criteria for identifying an employee or contractor: https://www.ato.gov.au/business/employee-or-contractor/difference-between-employees-and-contractors/
However, in order to provide an overall snapshot of the differences between an employee and a contractor, some of the key criteria are as follows:
Control and Independence: The level of control exercised by the payer over the worker’s activities is a crucial factor. Employees usually work under direct supervision and control, whereas contractors have greater autonomy over their work.
Tools and Equipment: The ownership, maintenance, and provision of tools and equipment are important considerations. Employees typically use the employer’s tools and equipment, while contractors generally provide their own.
Commercial Risk: Contractors bear the financial risk associated with their work, such as liability for rectifying defective work. Employees, on the other hand, are usually not financially liable for errors or losses arising from their work.
Basis of Payment: The method of payment can also indicate the nature of the working arrangement. Employees are typically paid a salary, wage, or commission, while contractors are paid a contracted rate for their services.
Independence of the Business: Contractors often have their own business structure, ABN (Australian Business Number), and liability insurance, which signifies a greater degree of independence compared to employees.
Integration: The level of integration of the worker’s services into the payer’s business is considered. Employees are typically integral to the employer’s operations, whereas contractors provide specialized services on a project basis.
Exclusivity: Contractors often have the freedom to provide services to multiple clients concurrently, whereas employees generally work exclusively for one employer.
Length and Permanency: The duration and permanency of the working relationship are assessed. Longer and ongoing engagements are more indicative of an employee relationship, while shorter, project-based arrangements lean towards contractor status.
These factors help to determine the level of control, independence, and other relevant aspects. While no single factor is decisive, the overall assessment provides a comprehensive picture of the working arrangement.
Legal Implications
Correctly classifying individuals as employees or contractors has significant legal implications. Employees are entitled to benefits such as paid leave, superannuation, and protection under employment laws, including unfair dismissal provisions. Contractors, being self-employed, are responsible for their own tax obligations, insurances, and do not receive these employee entitlements. Contractors do however have greater flexibility in conducting their work and are also able to delegate their work through sub-contracting.
Conclusion
Distinguishing between employees and contractors is a critical task under Australian law. The multifactorial employee test takes into account various factors, including control, equipment use, commercial risk, and payment arrangements. By considering the overall nature of the working relationship, employers and individuals can navigate the legal framework and ensure compliance with relevant employment laws. It is essential to seek professional advice or private rulings when uncertainties arise, as individual circumstances vary and can influence the classification outcome.
This article provides general information and should not be construed as legal advice. At Foulsham and Geddes, we provide advice in relation to all aspects of contract law. We know how to draft employment contracts in the client’s best interests and can provide strategic advice in relation to negotiating the terms of any new employment.
If you need help drafting or negotiating any such agreement, or otherwise have any questions regarding your rights and responsibilities when it comes to your employment or contractor work, please contact one of our lawyers on (02) 9232 8033 or via e-mail at fg@fglaw.com.au
[1] Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1.