The varied nature of work in a labour hire company often raises the question of whether a worker is an employee of the company or an independent contractor who is in business for themselves. Unfortunately, there is no hard and fast answer to this question. Previously, when making this determination, it was important to look at the individual circumstances that made up the whole arrangement with your worker. However, even though this is still important, the law now emphasises that the agreement between you and the worker is the most important element. This article will explore key considerations between employees and independent contractors.
Changes to the Law
In determining whether someone is an employee or an independent contractor, the previous landmark case of Hollis v Vabu held that the totality of the relationship is to be considered. However, the position at law has since changed. Now, Courts will look at the cases of ZG Operations & Jamsek and CFMMEU v Personnel Contracting, which has arguably made it easier to determine whether someone is a contractor or an employee.
The Contract Itself
To protect your labour hire company, the best thing you can do is ensure that you have a robust agreement that clearly sets out the terms of the arrangement with that worker. Likewise, the agreement must reflect the arrangement in place. If not, the court may label it a ‘sham’ and look past the agreement.
If you wish to engage workers as independent contractors, a well-drafted contract must affirm this relationship. You should include several key provisions in such a written agreement, including:
- the worker’s level of control;
- commercial and financial risk; and
- method of payment.
Control
When determining whether an individual is an employee or an independent contractor, the relevant degree of control that the labour hire employer can exert over the worker is critical to consider. If control ultimately rests with you and not the worker, the person is likely your employee.
Commercial and Financial Risk
Contractors will generally bear the commercial and financial risk over their work, whereas employees do not. When engaging employees, risks would be covered by the labour hire company, not the employee themselves. An agreement for a contractor should set out the warranties, liabilities and insurance requirements.
Method of Payment
A contractor will generally invoice your labour hire company through their Australian Business Number (ABN). On the other hand, employees receive payment for their work from you, as their employer, following your business’ payroll cycle (i.e. weekly, fortnightly or monthly).
Contractors are paid based on the ‘services’ they provide to your labour hire company. Conversely, an employee is paid for the ‘duties’ that they provide on behalf of your company.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
Key Takeaways
Whether a worker is an employee or an independent contractor will ultimately determine the rights that you must afford the worker and the obligations that you owe. The agreement in place must correctly reflect the arrangement itself. Indeed, there are consequences if you treat a worker like an employee but call them a contractor and, consequently, fail to provide employee entitlements owed to them under employment law.
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Frequently Asked Questions
In determining whether someone is an employee or an independent contractor, the previous landmark case of Hollis v Vabu held that the totality of the relationship is to be considered. This position has since changed. Today, Courts will look at the cases of ZG Operations & Jamsek and CFMMEU v Personnel Contracting, which places greater emphasis on the contract in place, so as long as the contract itself is not a ‘sham’.
To protect your business due to the changes to the law, the best thing you can do is ensure that you have a robust agreement that clearly sets out the terms of the arrangement with the worker. Contractors should have a high level of control over their work, and should invoice your business for payment of their services. They also bear their own commercial and financial risk. On the contrary, employees operate under the control and direction of their employer. Employees also receive payment from the business, in accordance with the business’ pay cycle. Finally, they bear no commercial or financial risk (the employer covers this).
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