As an employer, it is essential that you accurately determine if your workers are independent contractors or employees. The two differ greatly in terms of worker responsibilities and entitlements, which will impact the obligations you owe them. This article will explain the key legal differences between employees and contractors to help you better consider your business’ obligations to each.
Differences Between Employees and Contractors
If your worker enters into a contract of service with you, you should consider them an employee. However, if they enter into a contract for service, they are an independent contractor.
Essentially, an independent contractor runs their own business. Some key features of an independent contractor are that they:
- are usually engaged for a specific project or task;
- have a high level of control and independence regarding their work;
- decide what hours of work are necessary to complete their tasks;
- pay their own income tax and goods and services tax (GST);
- submit an invoice for their work;
- do not receive paid leave entitlements, except superannuation in some circumstances; and
- operate under an Australian business number (ABN).
On the other hand, employees do not have the same level of autonomy as contractors and must comply with all of your lawful directions. You also owe them more obligations, including:
- regular pay on a weekly, monthly or fortnightly basis;
- deducting income tax; and
- providing entitlements under the national employment standards (NES), including annual leave and sick leave.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
How Does the Court Determine the Difference?
Since February 2022, the court’s primary focus has been on the worker’s rights and obligations as found in their contract. It is essential that you provide all your workers with a written contract that you can easily consult. However, the courts may also consider the practical working relationship between you and your staff member as evidence of whether they are an employee or contractor. This is more likely when the contract is:
- incomplete;
- alleged to have been a sham; or
- varied by any following conduct on your or your worker’s part.
When considering the contract, the courts will look at whether:
- you can legally control the worker; and
- the worker is running their own business.
If you can legally control the worker and they are not running a business, the courts are likely to consider them as an employee.
Sham Contracting
A sham contracting arrangement is where an employer illegally tries to disguise an employment contract as an independent contractor arrangement. The most common reason for doing this is to avoid paying employee entitlements. It is crucial that you engage with employees and contractors honestly and in good faith.
Under sham contracting laws, you cannot:
- misrepresent an employment relationship as an independent contracting arrangement;
- dismiss or threaten to dismiss an employee because you want to engage them as an independent contractor; or
- make a knowingly false statement to persuade an employee to become an independent contractor.
Due Diligence
If you are a business considering engaging a contractor, it is important that you conduct due diligence on them to assess their suitability for the work that you are offering. Make sure you are well informed about their referrals and determine whether or not the contractor’s skill set is appropriate for the job. If any applicants do not match the job requirements, take your time and continue searching until you are confident that the contractor can complete the work to your satisfaction
Continue reading this article below the formWhy Should I Hire Contractors?
There are several reasons why you may choose to hire independent contractors rather than employees. For example, if your business is experiencing a busy period, you can temporarily engage contractors to help on specific projects. Alternatively, you can reduce the support you need during slower months so you only outsource what you need.
1. Contractual Rights and Obligations
The law protects independent contractors by providing for their minimum rights and entitlements. At a minimum, you must provide independent contractors with:
- fair contract terms;
- equal bargaining power; and
- payment in line with market rates.
In addition, if you enter into an independent contracting agreement, you and your contractor must take care not to engage in fraudulent means. Where minimum entitlements are not met, or if you breach these provisions, you risk facing severe penalties from the Fair Work Ombudsman.
2. Payments
Independent contractors will usually negotiate their payment as part of their contract for services. Their contract should either state that you are paying them regularly or at the end of their contract.
Independent contractors will submit an invoice to you when they require payment. If you do not pay their invoice, they can take legal action against you.
Moreover, you should note that independent contractors are responsible for paying their own income tax and GST, so you will not need to worry about their taxes.
3. Superannuation
In addition to paying their own tax, independent contractors may also be responsible for making their own superannuation contributions. However, there are some exceptions to this, which you need to consider.
For example, you may owe contractors superannuation payments if you pay them ‘wholly or principally’ for their labour. This occurs when:
- you provide payment for your contractor’s personal labour and skills;
- your contractor performs their work personally;
- you make payments for each hour of work rather than to complete a specific project.
The Australian Taxation Office has a useful contractor decision tool if you need assistance determining if you need to pay your contractors super contributions.
Key Takeaways
With a stark difference between the two, it is important that you determine if your workers are contractors or employees. This will greatly affect your business’ obligations. Some key legal considerations when employing contractors include:
- contractual rights and obligations;
- payment terms; and
- superannuation payments.
If you need assistance determining if your workers are employees or contractors, 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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