As business is becoming more and more competitive, more Australian employers turn to flexible and intuitive ways to cut costs and maximise profits.

It is tempting to toss the shackles of traditional employment in the bin and engage individuals as independent contractors instead of employees. For the independent contractor, the company does not withhold taxes and entitlements and the Fair Work Act do not apply.

However, there are dangers in engaging an individual as a ‘contractor’ without having a proper understanding of the law. You may find that an individual contractor is considered to be an employee at law, and this brings with it a range of legal consequences.

Main differences between an Employee and Independent Contractor?

A common myth is that you simply apply the ’80/20 rule’ to determine if the individual is a contractor or not. That is, you can engage an individual as a contractor as long as they don’t earn more than 80% of their income from your organisation.  This is simply not correct.

The main factor that differentiates between the two is the level of control that the individual has within the relationship. Therefore, determining whether an individual is an employee, or a contractor requires examining the whole relationship.

The characteristics of an independent contractor are:

• an entity that agrees to produce a specific result for an agreed price
• provides all or most of the necessary materials and equipment to complete the work
• is free to delegate work to other entities
• has freedom in the way the work is done and when
• provides services to other businesses
• is free to accept or refuse work
• takes commercial risks (and therefore generally need their own insurances)  

The characteristics of an employee are:

• is not responsible for paying for their own tax, an employer will deduct the income tax from an employee’s wage/salary.
• work to be completed is controlled by the employer.
• works according to a roster or set hours
• is supplied with tools and equipment (or receives an allowance)
• has no commercial or financial risk over the work as it is the employer who bears the responsibility

Are you at Risk of Sham Contracting?

Sham contracting is when an independent contractor’s arrangement is entered into by an employer to avoid their employer obligations such as superannuation, worker’s compensation and leave.

Sham Contracting is an illegal method of employment under section 357 of the Fair Work Act 2009 (Cth)

If an employer is not careful, they can be liable for serious penalties so it is critical to understand obligations and responsibilities in this regard.

Key Takeaways

As outlined, there are numerous indicators which will suggest whether a worker is an employee or contractor. To understand the difference between an employee and a contractor requires assessing the entire relationship between the employer and the individual.

As an employer, it would be prudent to review all existing contractual arrangements to ensure that you have not unknowingly misrepresented your employee as a contractor.