As contractors and employees have access to different rights and entitlements in the workplace it is essential that employers define their workers correctly to ensure they do not breach relevant workplace relations laws and are not making any under payments.
Employees that are covered by the Fair Work Act 2009 are entitled to various employment entitlements, including, but not limited to, minimum wages and paid annual and personal/carer’s leave, whereas contractors are not entitled to such conditions.
If an employer defines their worker as a contractor but is aware that the worker is in fact an employee, this is known as a sham contracting arrangement.
A sham contracting arrangement is legally prohibited and the Fair Work Act 2009 provides serious penalties of up to $33,000 in the case where an employer has misrepresented a worker.
The common law distinguishes between a ‘contract of service’ and a ‘contract for services’. For example, an employee works under a contract of service and a contractor works under a contract for services.
Defining the difference between an employee and a contractor can be confusing; however, there are a number of tests and factors that are used by the workplace relations courts to help determine the definition of a worker.
The following is a basic list of indicators which can be used to test if an employment relationship exists:
Right to Control
Where the employer directs or controls not only what work is to be done, but how it is to be done and who it is done by, then that is a strong indicator of an employment relationship. Independent contractors may refuse to perform certain tasks or duties, whereas an employee must comply with reasonable and lawful instructions from the employer.
Use of Employer’s Equipment
The use of an employer’s tools, plant and equipment is consistent with the worker being an employee.
Regular Hours
The working of regular and employer-specified hours could be an indication of an employment relationship.
Tax Deduction
The deduction of income tax, other than prescribed payments, is a strong indicator that the worker is an employee (but of itself is not determinative of the issue).
Delegation Rights and Freedom to Work for Others
An employee will be required to perform the work personally; however, an independent contractor will, in most cases, have the right to subcontract or delegate the work without consultation. An independent contractor is also able to accept work from, and perform work for, other companies without consultation.
Method of Payment
An employee is paid regularly while a contractor has their own ABN and provides an invoice to the company once the work is completed, or at the completion of set milestones.
Continuity
Where an understanding exists between the parties that their relationship is for an indefinite term and work is continuous, then this will be consistent with an employment relationship.
Dismissal for Misconduct
Where the right to dismiss for misconduct lies with the employer, the relationship of employer/employee is likely to exist.
Representation of Business
Where a worker is required to represent the employer’s business (e.g. through the use of employer-branded items such as business cards or uniforms) this is consistent with an employment relationship, whereas a contractor represents their own business.
For assistance in determining if your worker is an employee or a contractor, call Business SA's Business Advisory Service on 08 8300 0101.
