When an employer is looking to take on new workers, they must determine whether these individuals will be engaged as employees or independent contractors. This classification is essential as you must provide employees with entitlement that contractors cannot access. If you incorrectly classify a worker as an independent contractor when they are, in fact, an employee, the Fair Work Commission or Federal Court may order you to pay fines and superannuation plus other entitlements in addition to what you have already paid. This article explains how to determine whether your worker is an employee or an independent contractor and some of the legal consequences of such a classification
Employees vs Contractors
With the introduction of the Fair Work Legislation Amendment (Closing Loopholes) Bill 2023, the differences between employees and contractors have become more concrete. This is because:
- legislation now defines the term ‘employee’; and
- courts must look at the practical reality and true nature of the relationship between you and your worker when making a decision about their classification.
The table below summarises some of the factors that courts may consider when determining if a worker is an employee or a contractor.
| Employee | Contractor | |
| Hours of Work | Employees have set hours unless they are casual employees. | Contractors decide what hours they need to complete specific tasks. However, your business must agree to this. |
| Expectation of Work | Employees have an ongoing expectation of work except where they are casual employees. | Contractors are typically engaged to complete a specific task. |
| Liability | Employees bear no financial risk or liability, given they are covered under their employer’s insurance. | Contractors should obtain their own insurance, as appropriate. |
| Tools and Equipment | You must provide employees with tools and equipment or reimburse them for any costs associated with this. | Contractors typically provide their own tools and equipment. |
| Degree of control over how work is performed | Employees work under your direction and control. They will be required to comply with company policies. | Contractors have control over the way in which they complete their work. |
| Ability to subcontract and delegate | Employees cannot subcontract another individual to perform their role. | Contractors typically can subcontract work to another individual. |
What Factors Should I Consider?
It can be complex to make a determination as to whether an individual will be a contractor or employee where different factors lean toward different classifications.
When deciding if your worker is an employee or a contractor, you should place emphasis on:
- the degree of control you exercise over how and when the individual performs their work;
- whether it is feasible that the worker is functionally running their own business, including whether they have an Australian business number, insurance, and other factors.
What Are the Legal Consequences of an Incorrect Classification?
If you incorrectly classify a worker, you and your business may be in breach of the Fair Work Act and any applicable award. Additionally, you may be in breach of other obligations concerning:
- taxation;
- superannuation; and
- worker’s compensation.
Each of these breaches could lead to major financial penalties and back payments.
If you knowingly misrepresent an employee as a contractor in their employment agreement, you will have engaged in an unlawful sham contracting arrangement. If an employee of your business engages another worker in this way, your business may still be vicariously liable. Penalties for sham contracting include a maximum penalty of $18,780 for individuals and $93,900 for corporations per contravention.
As an employer, you must also classify your workers correctly for tax and superannuation purposes. Otherwise, you could face significant financial penalties.
Whether it’s your first hire or your fiftieth, this guide will help you understand the moving parts behind building a high-performing team.
Superannuation
The law that governs the superannuation guarantee and workers’ compensation defines ‘employee’ slightly differently. The relevant law around superannuation defines an employee as an individual who is ‘paid wholly or principally for their labour’. Generally, when a Court makes this determination, it considers whether:
- the individual personally performs the work;
- you pay them for hours worked or to achieve a result;
- you pay them primarily for their specific labour and skills; and
- the individual has a right to delegate work.
Therefore, even where an individual generally operates as a contractor, they may still be deemed an employee under the relevant superannuation legislation and thereby be entitled to superannuation contributions.
Further, the Australian Tax Office Superannuation Test can help you determine if your employees and certain contractors are eligible for the superannuation guarantee. The test will ask a series of questions regarding the relationship between your business and the worker.
Continue reading this article below the formKey Takeaways
Navigating the differences between contractors and employees can be daunting. However, it is important that you classify your workers correctly; otherwise, you could face significant financial penalties. The recent amendment to Fair Work legislation has significantly changed the court process in making this determination, and you should now consider the totality of the practical relationship when engaging contractors.
If you are unsure whether your worker is an employee or an independent contractor, 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 1800 534 315 or visit our membership page.
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