Independent contractor or employee: Do you understand the difference?
By Peter Ray
Engaging a person as an employee or an independent contractor will dictate the extent of a business’s responsibility to that the person and also has important tax and superannuation implications.
The following table illustrates just some of the consequences for businesses dependent on whether a person is engaged as an employee or independent contractor of that business.
| Matter | Employee | Independent Contractor |
|---|---|---|
| Superannuation | Entitled to have superannuation contributions paid into superannuation fund by their employer | Generally pay their own superannuation (with some limited exceptions) |
| Income tax | Has income tax deducted by their employer | Pays their own tax and GST to the ATO |
| Payroll tax | Employer is liable to pay payroll tax to the ATO | Person engaging the contractor is not required to pay payroll tax |
| Leave | Entitled to receive paid leave (e.g. annual leave, personal leave, long service leave) | Is not entitled to received paid leave |
| Liability (which affects the insurance businesses should obtain) | Employer generally speaking is vicariously liable for the acts and omissions of their employees. | Generally speaking the person engaging the contractor is not liable for the acts or omissions of a contractor. |
Due to the obligations placed on employers, many businesses will now prefer to engage people as independent contractors.
However, businesses should be careful as to how they go about this as, in addition to tax consequences or being liable to back pay superannuation etc., civil penalties apply to businesses that engage in “sham” practices where businesses purport to engage a person as an independent contractor, thus avoiding the obligation to pay superannuation, give paid leave etc, when in fact the person is actually an employee and entitled to those things.
Calling a person an “employee” or “independent contractor” in a contract of engagement is not definitive of the category of engagement and courts will look behind the agreement to determine whether a person is an employee or independent contractor.
So what do courts look at when determining whether a person is an employee or an independent contractor?
Historically, courts would look at the level of control by the person engaging the other person to determine whether or not that second person is an employee of not.
A person who agreed to detailed control by another in relation to what work was to be performed, where it was to be performed, when it was to be performed, and how it was to be performed, would be characterised as an employee.
The usefulness of the control test has eroded over time because in many modern instances an employee may have a significant degree of autonomy over how they perform their work or where or when it is performed (for example, many workplaces will now allow flexible working arrangements where employees are able to exercise a degree of control over when they work and are often permitted to work from home).
In recognition of the inadequacy of the control test, the courts have turned to a multi-factor approach to assist in determining whether a person was an employee or not control being just one of the relevant factors. In other words, the courts examine the totality of the situation between the parties in order to reach a conclusion.
Some of the factors which the court will consider when determining the type of work relationship are detailed in the below table. A court will place weight on different factors depending on the circumstances.
| Indicator | Employee | Independent Contractor |
|---|---|---|
| Degree of control over how work is performed | Performs work under the direction of employer on an ongoing basis | High level of control over how the work is done. |
| Hours of work | Generally works set hours | General decides what hours to work to decide to complete the task. |
| Expectation of work | Usually has ongoing expectation of work | Usually engaged for a specific task. |
| Risk | Bears no financial risk | Bears the risk for making profit. Usually also bears liability for standard of work or injury caused while performing task. |
| Tools and equipment | Tools and equipment generally provided by employer. | Generally provides own tools and equipment. |
| Method of payment | Paid regularly | Has ABN and submits invoices for work completed. |
Recent developments
The multi-factor approach has been largely unchallenged by the courts in the past three decades; however the courts have recently taken a subtle shift in approach to the multi-factor test.
In the Federal Court case of On Call Interpreters and Translators Agency Pty Ltd v the Commissioner of Taxation (No 3) [2011] FCA 366, Justice Bromberg did not reject the multi-factor test but created a further “entrepreneurship test” when he described what he saw as the “central question” in the multi-factor test:
“…Viewed as a ‘practical matter’: is the person performing the work an entrepreneur who owns and operates a business; and, in performing the work, is that person working in and for that person’s business as a representative of that business and not of the business receiving the work?”
In other words, the court held that when looking at the matter as a whole, if a person is working in their own business for their own benefit, this is indicative of the person being an independent contractor.
This “entrepreneurship test” approach was supported in Ace Insurance v Trifunovski [2011] FCA 1204 and Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] FCAFC 37 however it was rejected only two months later in Tattsbet Limited v Morrow [2015] FCAFC 62.
The court in Tattsbet Limited v Morrow [2015] FCAFC 62 affirmed that the only relevant test is the multi-factor test and the degree of entrepreneurship is but one of those factors.
The decision of Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] FCAFC 37 was appealed to the High Court in the case of Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] HCA 45.
The High Court’s decision ultimately centred on a different issue but held that the Federal Court made the correct decision in determining the persons in question were employees and not independent contractors.
However, the High Court did not make comment about the “entrepreneurship test” which was adopted by the Federal Court, therefore leaving the open the possibility of the entrepreneurship test resurfacing in Australian law.
It can be seen from the above that whether a person is an employee or an independent contractor is not always clear and where unsure, businesses should seek legal advice as the consequences of getting it wrong can be severe.
To discuss what options could apply to your situation, contact Slee Anderson & Pidgeon on 08 97 920 920.
The contents of this publication are not legal advice to anybody who receives it and should not be treated as legal advice. You should not take any action following reading this publication without legal advice concerning its application or relevance to your own circumstances.