Independent contractors and employees can often be incorrectly classified. Sometimes, employers deliberately classify workers as independent contractors to avoid certain tax and superannuation obligations. In other instances, it is common that an inadvertent mistake has been made. As such, this article will debunk some common myths surrounding independent contractors by first explaining its legal definition, and then outlining some of their differences with employees.
What is an Independent Contractor?
Independent contractors are individuals or operating businesses that are hired to perform specific duties. The Independent Contractors Act 2006 (Cth) explicitly states that independent contractors are not limited to people. If a company, trust, or partnership has been engaged by a company, they will be considered contractors. The confusion often arises as it is the people within these organisations that carry out the work.
In particular, if the engagement is with an individual who also operates their own business (for example, as a sole trader), it is easy to see how that person could be confused for an employee. You will need to look at the particular working arrangement to determine the employment status of these individuals. These factors are set out below.
What is the Difference Between Independent Contractors and Employees?
The difference between independent contractors and employees can often be murky. Courts will look at the whole working relationship between the parties to determine the employment status of an individual. There is no single determining factor which separates the two.
Some factors that a court may consider include:
- Payment (i.e. what is the method, basis and frequency?);
- Commercial and financial risk (i.e. who bears the risk if something goes wrong?);
- Tools and equipment (i.e. who provides them?);
- Control over work (i.e. what freedom does the worker have about how the work is done?);
- Independence (i.e. is the worker considered to be within the business?)
This list is by no means exhaustive. Certain factors may suggest one employment status over another, but they must be taken in their totality.
Myths About Independent Contractors
Due to the unclear definition of independent contractors, it is common for employers to make presumptions in favour of a contractor relationship. Here are nine common myths people associate with independent contractors:
1. You are an Independent Contractor If You Have an ABN
Having an ABN will not automatically make you an independent contractor. Employers may request your ABN in the hope they can minimise tax obligations and superannuation payments. As mentioned, the total working relationship determines whether you are an employee or a contractor.
2. Contracts Determine Whether You are an Independent Contractor
Contracts and agreements cannot override the law. Thus, if you are legally a contractor at law, the specific clauses in your contract suggesting otherwise will be void and severable.
3. Individuals With a Special Skillset or Qualification Are Contractors
It is a fallacy to assume that someone’s skill level or qualification determines their employment status. Skill and qualification level, including whether the worker is a ‘white’ or ‘blue’ collar worker, makes no difference and it is the whole working arrangement that determines whether you are an employee or contractor.
4. You are an Independent Contractor If You Do Not Get Paid Superannuation
This is a backwards approach to employment status. The superannuation status should not determine whether a worker is a contractor or employee. In any event, contractors who are paid for their labour (i.e. more than half the dollar value of their contract is for labour), whether it be physical, mental or artistic, are employees for superannuation purposes.
5. A Registered Business Name Makes You an Independent Contractor
Having a registered business name does not make you an independent contractor. For example, if John has a registered business name for a lemonade business he runs on the weekend, but performs work for an employer on the weekdays in the capacity as an employee, the employer cannot force John to become an independent contractor.
7. Everyone in a Particular Industry is an Independent Contractor
Industry practice does not determine employment status. For the most part, ‘everyone else’ should be ignored and the focus is on the worker and the employer.
8. You are Automatically a Contractor If You Only Work for a Short Period
The length of work and regularity of shifts makes no impact on the employment status of individuals. Both employees (especially casual employees) and independent contractors could be on call to work temporary, short, and infrequent shifts.
9. Invoicing Makes You an Independent Contractor
Workers who submit an invoice or ‘paid on invoice’ can be either an employee or independent contractor. Again, there is no determining factor, but it is the whole relationship that should be examined.
The fact is that it is okay to classify a worker as an independent contractor after assessing the entire working arrangement. However, it is a myth to assume the employment status of an individual based on single factors.
This article has debunked some popular myths surrounding independent contractors. However, if you are still unsure or have any questions, it is advisable you speak with a qualified employment lawyer. Contact LegalVision’s employment lawyers on 1300 544 755.
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