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A common issue which arises is whether a person has been engaged as a contractor or employee.  The latter is entitled to certain paid benefits and minimum wages with lack of payment of these benefits often being subject of disputes.

There has been an increase in disputes around these issues due to recent trends in businesses engaging independent contractors to perform work as it allows flexibility in operating the business, some deflection in liability and it can, in some circumstances, prove to be a cheaper option than employing someone. The contractor relationship is particularly common in the building industry.

Whilst there are some specific distinctions to be able to identify an employee from a contractor, the line is often blurred because the business owner wants the benefits of the contractor relationship but will treat the person as if they are an employee.

An important distinction is that employees will either work part-time, full time or on a casual basis and will work under the specific direction of the employer. In contrast, a contractor usually run their own business, nominating their own hours and having control over how and when the work is completed.

Whilst it may seem simple, it is often not a straight forward process to determine whether a person is an employee or an independent contractor and there are various factors that need to be taken into account when determining this.

Some examples of the differences between employees and contractors are set out in the table below.

FactorsEmployeeIndependent Contractor
1.Degree of controlMust work under the directions of employerMakes their own decision to complete the work (subject to the terms of the contract) and can normally delegate work to third parties
2.Leave BenefitsFull-time and part-time employees are entitled to paid leave (i.e. annual leave, sick leave, parental leave, bereavement leave)An independent contractor is not entitled to any leave benefits.
3.Working hoursStandard hours for part time and full time; casual in accordance with any relevant industrial awards and / or the Fair Work Act 2009 (FWA)Pursuant to a contractor agreement but generally is flexible and determined by the contractor.
4.PaymentRegular payment of wages after deduction of withholding tax by the employer, amount as agreed under the employment contract and must be in accordance with any relevant industrial awards or FWAThe contractor issues an invoice for his or her works which is paid in accordance with the invoice terms or as agreed under the contractor agreement.

The independent contract is also responsible themselves for GST and tax payments.

5.UniformAn employer will often supply and require its employees to wear a uniform which identifies their business.An independent contractor will supply their own uniform (if necessary).

 

In applying the above factors to determining whether a worker is an employee or independent contractor, the first point of reference will be the written contract between you and the other party. The Court will not only consider the terms of the contract, it will also consider the actual conduct of the parties to make the decisions.

Importance of knowing the difference between an employee and a contractor

There are serious consequences when you misrepresent your employee as an independent contractor, and it does not matter whether it is intentional or not.  In doing so, you are denying employee’s entitlements which is a breach of the FWA and it is likely that you would be ordered to pay the person the entitlements which they are owed if it is found you have incorrectly classified them as an employee and not an independent contractor. This could be a significant amount of money, in particular the relationship has been in place for a long period of time. It is also possible for a Court to impose a penalty on the business for breaching the FWA.

Engaging a worker as an independent contractor is only beneficial to your business when you correctly identify the relationship with your business. As discussed above, it will cost you more if this is not assessed at the time of engagement properly. If you are unsure whether you have classified someone correctly as an independent contractor or an employee then contact the team at Clarke Hemmerling Lawyers at 08 8333 2130 for advice.

This Blog was written by Renee Hii, Solicitor at Clarke Hemmerling Lawyers.

This blog post does not constitute legal advice and should not be relied upon as such. It is a general commentary on matters that may be of interest to you.  Formal legal or other professional advice should be sought before acting or relying on any matter arising from this communication.