As head contractor, you will most likely employ someone to perform a particular task of the work you have been contracted to accomplish. To ensure you meet your legal obligations, it is crucial to classify and provide your workers with their entitled benefits correctly. The minimum entitlements owed to your workers depend on whether they are employees or contractors. However, determining whether your worker is a contractor or an employee is not always straightforward. This article will outline the key differences between a contractor and an employee, as well as how to protect your business from misclassifying your workers.
Differentiating Between Employees and Contractors
Deciding whether a worker is an employee or a contractor is sometimes a simple decision. You can’t interchange the terms’ employee’ and ‘contractor’ because the requirements for each are vastly different.
Key Differences Between Employees and Contractors
The table below shows a more precise breakdown of the main differences between employees and contractors in each area:
| Employee | Contractor | |
| Period of Engagement | Firstly, depending on the type of employment, an employee is employed on a permanent or fixed-term basis. | Conversely, a contractor is usually engaged:
|
| Payment | The Fair Work Act 2009 (Cth) outlines the minimum amounts employees should be paid. All employees are entitled to the national minimum wage, but may also be covered by a modern award or enterprise agreement, which will set out their minimum entitlements, such as their minimum pay rates. Payment usually occurs on a recurring basis: weekly, fortnightly, or monthly. Payment also includes superannuation contributions. | A contractor is a business in its own right and will determine its fees to maintain a commercially viable business. Before the contract commences, payment terms must be decided. Contractors generally receive payment when a project or element of a project is complete. |
| Entitlements | The Fair Work Act 2009 (Cth) outlines the minimum amounts employees should be paid. All employees are entitled to the national minimum wage, but may also be covered by a modern award or enterprise agreement, which will set out their minimum entitlements, such as their minimum pay rates. Payment usually occurs on a recurring basis: weekly, fortnightly, or monthly. Payment also includes superannuation contributions. | Specific entitlements afforded to contractors are in the contractor agreement. Usually, contractors will pay their own:
|
| Liability | Overall, the employer is responsible for the work that their employees complete. As such, employees generally bear no financial or commercial risk. | In contrast, contractors bear their own financial and commercial risk and, consequently, will be responsible for the work’s quality and timelines. For this reason, contractors will generally have their own insurance. |
| Contract | Finally, the employee will need an employment agreement which includes terms about the following:
| While employees require employment agreements, contractors need subcontractor agreements. |
| Tools and Equipment | Generally, an employee will be provided tools and equipment to use by their employer. | A contractor uses their tools and equipment. |
| Control | Employees work under the direction and control of their employer. | A contractor has a high level of control over how the services are provided within the terms of the contract. |
| Right to Delegate | Employees cannot simply delegate their work to other employees. | If permitted by the terms of the contract, a contractor may delegate or subcontract their work to a third party. |
How to Prevent Misclassifying Workers in Your Business
The differences outlined in the table above can help you determine whether a worker is a contractor or an employee. However, you still need to take steps to prevent misclassifying your workers.
Previously, courts considered the entire relationship between parties to determine if a worker is an employee or a contractor. However, in the recent decision of ZG Operations & Jamsek and CFMMEU v Personnel Contracting, the High Court changed this approach. It stated that the terms of the written agreement are the most critical consideration when determining if a worker is an employee or a contractor. It’s essential to note that the court may still consider other factors if the written agreement does not accurately reflect the true nature of the relationship, such as if it’s a sham.
To protect your business in case of a dispute over a worker’s classification, ensure you have a comprehensive contractor agreement in place that reflects a genuine contracting arrangement.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
Key Takeaways
To ensure you fulfil obligations to your employees and contracts, you must know how to differentiate between the two. The critical areas of difference between employees and contractors include
- the period of engagement;
- payment amounts and terms;
- entitlements;
- liability for work completed;
- the types of employment contracts;
- use of their tools and equipment;
- their level of control over work; and
- the right to delegate.
The best protection for your business when engaging contractors is having a robust contractor agreement in place that reflects the true nature of the worker’s engagement.
If you have any questions about the distinction between employees and contractors or need assistance with drafting agreements, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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