What is the difference between an employee and a contractor?
This is one distinction that has proved difficult for businesses to get right and has seen many individuals taken advantage of and deprived of numerous entitlements.
An error in correctly classifying an employee or independent contractor can result in hefty penalties for business and numerous missed entitlements for individuals so this is a very important distinction to make, and to make correctly.
At a very basic level, an employee is a person who is employed by a company or business to work for wages or salaries while a contractor provides labour or services pursuant to a contract.
How does it affect me if I am engaged as a contractor rather than an employee?
Employees have numerous entitlements that a contractor does not benefit from including superannuation guarantee, annual leave and workers compensation insurance. The costs of these additional employee benefits to an employee are quite significant and it is not surprising that some employers either knowingly or unknowingly will take advantage of what they see as a way to cut back on these costs. If a business enters into a contract with an independent contractor they will have less costs and less obligations than if they hired an employee for the same work.
It is important that you are aware of the differences between an employee and a contractor so that you are not unwittingly taken advantage of and so that you can benefit from the entitlements of an employee if that is the true nature of your work relationship.
How do I know if I am an employee or a contractor?
Just because a contract is signed rather than an employment agreement and the individual holds an Australian Business Number does not automatically mean that they are a contractor. While the contract will be relevant and it is certainly important, it is not the deciding factor.
There are several main points that a court will consider to determine whether you are an employee or a contractor. It is important to note that the court will assess all factors to determine the actual nature of the relationship and not just what is written on paper. This is known as the common law test. To gain an understanding of what the court will take into account when weighing up the facts, some of the main questions you should ask yourself are as follows:
- Tools and equipment: Generally, a contractor will provide their own special tools or equipment necessary for completing the labour. An employee uses equipment provided by the employer or is reimbursed if they purchase their own.
- Subcontracting: A contractor may delegate the labour to others, while an employee is the sole individual performing the work.
- Exclusivity: An employee is considered part of the business and they do not operate independently outside of the business. A contractor can provide their services to multiple clients at once.
- Control over work: A contractor will generally decide how the work is performed, while an employee will be given direction by the employer.
- Liability: Any defects in the labour performed and subsequent remedy expenses are usually the obligation of the contractor. If an employee is at fault, the liability is that of the employer or business, rather than the individual.
- Payment: An employee will be paid hourly award rates, commission, or per piece/activity performed. Contractors typically get paid based on the quote they give for the specific task, once it is completed.
The common law test is certainly multi-layered and just because you have been given the label of independent contractor does not mean that this is necessarily correct. “The parties cannot create something which has every feature of a rooster, but call it a duck and insist that everybody else recognise it as a duck”:Re Porter; ex parte TWU (1989) 34 IR 179 at 184. There is no one size fits all and each test will turn on the facts of that particular relationship.
For example, in the matter of Damevski v Giudice and Others (2003) 133 FCR 438, the court determined that the Applicant was an employee as he did not have independence in conducting his own business; the company determined his rates and directed exactly how the work was to be performed.
Do I have to make my own superannuation contribution payments?
While the common law test may determine that you are a contractor, you may still be deemed to be an employee under legislation for some specific benefits.
The Superannuation Guarantee (Administration) Act 1992 (Cth), State and Territory Payroll Tax legislation and Workers Compensation legislation all have provisions that may deem an individual to be an employee in specific circumstances. It is important that you are aware of these provisions and how they may apply to you. They may require the business to make superannuation payments on your behalf or require that you be covered under the business’ workers compensation scheme, both of these may result in a significant savings or benefit to you if you are deemed an employee under these provisions.
Where to next?
It is important to seek clarification as to whether you should be employed as an employee or enter into a contract as an independent contractor. The ATO has a useful decision tool to determine if an individual is an employee or contractor. Should you have any confusion over which you should be classified as, it is important that you seek individual legal advice as you could be missing out on numerous employee entitlements.