Reading time: 6 minutes

As an employer, you might consider whether you can convert your employees to independent contractors. There are some benefits to doing so, primarily financial. However, it is important to remember that you should not miscategorise employees as contractors, as there are penalties for doing so. Therefore, if you wish to convert your employees to contractors, they must firmly fit in the category of independent contractors. To help you better understand, this article will take you through the key factors that indicate whether your workers can be considered contractors.

Employment Essentials Factsheet

As an employer, understand your essential employment obligations with this free LegalVision factsheet.

Download Now

Reasons to Convert Employees to Contractors

There are many reasons why you might want to change your employees to contractors. For example, hiring contractors often costs less than hiring employees. This is because contractors are not entitled to superannuation benefits or leave entitlements. Therefore, it can be more affordable to pay contractors in the long term.

Moreover, as an employer, you will generally only hire contractors when your business requires their services. As such, you might seek to hire a contractor if you have a specific project that needs completing or if you need to temporarily fill a skills shortage. This will certainly be appropriate if your business experiences significant income fluctuations or completes projects that are subject to external funding. 

Can I Convert Employees to Contractors?

Broadly speaking, it is possible to transition an employee to a contractor. However, this is only possible if the worker meets the legal tests for independent contractor status. If the worker continues to perform the same work in the same capacity they did as an employee, it is unlikely that they will meet these requirements.

As an employer, it is important to understand the laws surrounding sham contracting. Sham contracting occurs when an employer attempts to disguise an employment relationship as an independent contractor’s agreement. Under the Fair Work Act 2009 (FW Act), an employer cannot:  

  • misrepresent an employment relationship or a proposed employment arrangement as an independent contracting arrangement;  
  • dismiss or threaten to dismiss an employee to engage them as an independent contractor; or  
  • make a knowingly false statement to persuade or influence an employee to become an independent contractor. 

Therefore, you need to be cautious when determining if the worker in question is eligible to be a contractor. If you hire a worker as a contractor where they should be an employee, this will be considered sham contracting. Sham contracting is a serious offence, and you will be eligible for penalties of up to $66,600.

Differences Between Employees and Contractors

It is important to recognise that an employee or an independent contractor will not automatically be classified as such because of their type of work. For instance, a worker might perform the same type of work as an employee but still be considered an independent contractor because of the other circumstances at hand.

Several key indicators distinguish employees from independent contractors. Therefore, when transferring employees to contractors, ensure the appropriate indicators are in place to avoid miscategorising your staff. The table below outlines key indicators to keep in mind.

Key Factors

IndicatorEmployeeIndependent Contractor
IntentionThere is an intention to create an employee/employer relationship.

For example, the worker provides their tax file number and superannuation details and signs an employment contract.
There is an intention for the worker to be engaged as an independent contractor.

For example, they: provide an Australian business number (ABN); sign an independent contractor agreement; and provide invoices for work undertaken.
ControlThe employee performs work under the direction of a manager or supervisor, who also determines where the employee works when they work, and how work is completed.Independent contractors have a high degree of control over their work, including when they work, where they work and how they conduct their work.
ResponsibilityFinancial responsibility falls to their employer.Bears the risk for profit and loss on all tasks and is personally liable for injuries that occur while conducting work.
Working hoursUsually works a standard or set working hours, with the exception of casual employees.Decide what hours they will work, which are usually agreed upon in their Independent Contractor Agreement
TaxThe employer deduces income tax.Pays their own income tax and Goods and Services Tax (GST).
SuperannuationEntitled to superannuation contributions.Is responsible for paying their own superannuation contributions.  (Note in some circumstances, employers may have to contribute to their contractor’s superannuation.  You should seek advice in this regard.) 
Ongoing workCan usually expect ongoing work, except in situations where they are employed on a casual basis or on a fixed-term contract.Is usually engaged in a specific task and has no guarantee of ongoing work.
Leave entitlements Entitled to receive paid leave (except in the case of casual employers). This includes long service leave, annual leave, sick leave etc.Not entitled to paid leave. 

*Information sourced from Fair Work Australia.

Key Takeaways

If you wish to transfer your employees to independent contractors, you need to ensure that they firmly fit into the definition of an independent contractor. If your worker continues to perform the same work in the same capacity they did as an employee, it is unlikely that they will meet these requirements. Some key indicators to consider include:

  • intention;
  • control;
  • responsibility;
  • working hours;
  • tax;
  • superannuation;
  • ongoing work; and
  • leave entitlements.

If you need assistance moving employees to 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.

Frequently Asked Questions

What is an independent contractor?

An independent contractor differs from an employee as they run their own business while providing services to an employer. Some key features of an independent contractor are that they determine their own scope of employment and can refuse and accept work as they wish.  Independent Contractors are paid on a performance basis and have a separate Australian Business Number (ABN). Unlike employees, independent contractors do not receive leave entitlements and are not typically entitled to superannuation payments.

Can an employee become a contractor?

It is possible to transition an employee to a contractor. However, this is only possible if the worker meets the legal tests for independent contractor status. If the worker continues to perform the same work in the same capacity they did as an employee, it is unlikely that they will meet these requirements.

Webinars

New Kid on the Blockchain: Understanding the Proposed Laws for Crypto, NFT and Blockchain Projects

Wednesday 25 May | 10:00 - 10:45am

Online
If you operate in the crypto space, ensure you understand the Federal Government’s proposed licensing and regulation changes. Register today for our free webinar.
Register Now

How to Expand Your Business Into a Franchise

Thursday 26 May | 11:00 - 11:45am

Online
Drive rapid growth in your business by turning it into a franchise. To learn how, join our free webinar. Register today.
Register Now

Day in Court: What Happens When Your Business Goes to Court

Thursday 2 June | 11:00 - 11:45am

Online
If your business is going to court, then you need to understand the process. Our free webinar will explain.
Register Now

How to Manage a Construction Dispute

Thursday 9 June | 11:00 - 11:45am

Online
Protect your construction firm from disputes. To understand how, join our free webinar.
Register Now

Startup Financing: Venture Debt 101

Thursday 23 June | 11:00 - 11:45am

Online
Learn how venture debt can help take your startup to the next level. Register for our free webinar today.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards