Employers and workers are attracted to consultancy as it can offer both parties flexibility, independence, and importantly, dual benefits. From an employer’s perspective, it eliminates the need for long term work engagements and the need to pay certain minimum employment entitlements per the National Employment Standards. In this regard, there are cost savings to be made. Contractor arrangements also allow employers to tap into a wealth of external knowledge by outsourcing roles that were traditionally occupied by internal staff members.

From an employee’s perspective, consultancy work offers the ability to work on a range of diverse projects that they would not have had the opportunity to partake in were they employed by a single organisation. Further, and as a general rule of thumb, consultancy work tends to be quite specialised and/or niche in nature, allowing contractors to negotiate favourable remuneration packages for their services.

As eluded to in the preceding paragraph, Consultants are typically hired under a Contractor’s Agreement. However, the varied nature of consultancy work gives rise to the question of whether a worker is an independent contractor or an employee. Most parties who engage independent contractors tend to assume that because the engagement contract stipulates that a worker is an independent contractor, that’s the end of it. Unfortunately, this is not the case and in fact, there are no hard and fast answers to this question. Whether a worker is an independent contractor as opposed to an employee depends on the individual circumstances of the engagement. However, we set out some legal principles below to help explain how to determine whether a worker is an independent contractor or employee.

The Relationship as a Whole

In determining whether a worker is an employee or an independent contractor, the whole of the relationship must be considered, particularly:

  1. The degree of control maintained by the employer;
  2. The worker’s right to delegate work to others;
  3. The worker’s ability to generate goodwill for the business;
  4. Whether the worker holds themselves out as a representative of the employer;
  5. The provision and maintenance of equipment;
  6. The nature of the profession or calling;
  7. The exclusivity of the engagement, namely whether the worker performs work for others (3rd parties);
  8. The frequency of the engagement;
  9. The mode of remuneration;
  10. The provision of National Employment Standard entitlements;
  11. The deduction of income tax (if any);
  12. The employer’s right to suspension and termination; and
  13. The nature of the work undertaken, just to name a few.

Where the employer retains the right to control substantial matters rather than over day-to-day activities, the worker will be considered an employee as opposed to an independent contractor (Hollis v Vabu (1986) 160 CLR 16 at 40 – 41).

Relevant considerations include the employer’s exercise of control over how the employee performs the work, the place of work and hours worked (Abdalla v Viewdaze Pty Ltd 92003) 112 IR 215 at 229). Importantly, where the work involves high levels of skill and experience (e.g. technical IT skills), even autonomous workers may be regarded as employees, provided that control over incidental matters is maintained (Zujiz v Wirth Bros Pty Ltd (1995) 93 CLR 561 at 571 – 572). Similarly, regular and consistent hours of work tend to suggest that a worker is an employee as opposed to a contractor.

A worker who represents themselves as an employee of another is more likely to be an employee than a person who doesn’t (Roy Morgan Research Pty Ltd v Commissioner of Taxation [2010] FCAFC 52 at 44). This is especially the case where the worker does not in fact work for others and works exclusively for the employer (Barrett v Create (Geelong) Inc t/as Create [2010] FWA 5576 at 48 – 53).

Where an employer supplies workers tools of trade, this is a strong indicator that the worker is an employee as opposed to independent contractor (Australian Air Express Pty Ltd v Langford [2005] NSWCA 96). Conversely, workers that make substantial investments in capital and tools of trade are more likely to be considered independent contracts.

Substance Over Form

Most employers find it hard to accept that the reality of an engagement is markedly different to the written terms of an agreement that has been drafted to set out the same. In fact, time and time again, those that engage consultants have gotten themselves into trouble by failing to provide their workers with minimum employment standards. Commonly because of their mistaken belief that their workers were effectively and legally engaged as independent contractors. Ignorance of the law is no excuse. Legal principles clearly establish that the substance of an agreement takes precedent over its form. Accordingly, parties to an agreement cannot rely on the document if it does not reflect the reality of the situation.

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Whether a consultant is an employee or an independent contractor will ultimately depend on the particular circumstances of the engagement. If you are unsure about the status of your current or prospective consultancy workers, get in touch with our employment team on 1300 544 755.

Vanja Simic

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