The distinction between who is an employee and who is an independent contractor has always been unclear. This is well-accepted, even at the judicial level. In the hope of providing some clarity to this murky area of the law, the courts have continually adapted their approach to solving questions of “employee or independent contractor” by, among other things, expanding the criteria for the two categories of workers.
This paper will provide a short summary of each criterion which has been considered by the courts in application of their “multifactorial” approach to questions of “employee or independent contractor”.
The distinction between an employee and an independent contractor is rooted in the difference between a person who “serves” his or her employer, and a person who carries on a trade or business on their own.1 This difference sits at the heart of the “control test”2 – an objective test which looks to the degree of control which the person who engages another to perform work can exercise over the person so engaged.3 The greater the degree of control, the more likely the worker will be classified as an employee. This was once the only test applied by the courts to determine whether a worker was an employee or an independent contractor.
The conditions and norms of the employment relationship are constantly changing. A distinguishing feature of modern employment relationships is the reduction in employers’ control over their employees. With the balance of power between employers and employees slowly evening out, courts have been lured away from the “control test” they once idolised.
What the courts have been drawn to is an assessment of the “totality” of the particular relationship.4 In essence, this means that a number of factors must be considered before the court can conclude whether a worker is an employee or an independent contractor.
How these factors manifest for each category of worker is summarised in the table below.
|Degree of control
|Works under the direction and control of the employer on an ongoing basis.
|Has significant control over the way in which their work is done.
|Method of payment
|Generally paid a set amount at regular intervals, for example, weekly, fortnightly or monthly.
|Has obtained an ABN and submits invoices for work completed or paid at the end of the contract or project.
|Entitled to have superannuation contributions paid into a nominated superannuation fund by their employer.
|Generally makes their own superannuation contributions.5
|Deduction of income tax
|Income tax is deducted from wages by the employer.
|Pays own income tax and GST, where applicable.
|Tools and equipment are normally made available or a tool allowance is provided.
|Generally required to use own tools and equipment. Do not receive an allowance to cover expenses for providing tools and equipment.
|Bears no commercial risk for work that is performed.
|Bears the risk for making a profit or loss on each task. Also, usually bears responsibility and liability for poor work or injury sustained while performing the task. As such, contractors generally have their own insurance policy.
|Obligation and expectations to work
|Generally has an on-going expectation of work, unless employed on a set-term basis.
|Generally engaged for the completion of a specific task.
|Hours of work
|Generally required to work a standard number of hours per week.
|Generally has control over the hours of work so long as the specific task is completed within the designated time frame.
|Provision for leave and holidays
|Generally entitled to annual leave, personal/sick leave or long service leave. Alternatively, the worker generally receives a loading in lieu of these entitlements.
|Does not receive any paid leave or loadings.
|Worker’s ability to subcontract tasks
|Normally a requirement that the work be personally exercised by the worker. No opportunity to sub-contract work.
|Normally free to sub-contract or delegate work, or otherwise control who is to perform the required work.
|Creation of goodwill or saleable assets
|Goodwill or saleable assets normally created in the name of the employing entity.
|Goodwill or saleable assets normally created in the name of the worker.
Although some factors are perhaps more indicative than others, no single factor is determinative. The court will look at the whole picture when making its assessment and will determine each case on its merits.
There are clear and rather substantial differences in the rights and responsibilities of employees and independent contractors under Australian employment law. Incorrectly classifying workers exposes employers to a number of significant legal risks. These include:
- Liability for superannuation charges.
- Liability for accrued employee entitlements and/or lost wages.
- Liability for acts or omissions of the worker amounting to breaches of the law.
- In the case of a worker whose employment has been terminated, claims of unfair dismissal or adverse action and further associated liabilities.
- Civil penalties for breaches of the relevant statutes, including the Fair Work Act 2009 (Cth).
- Voiding of the employer’s indemnity under its workers compensation insurance on the basis that the employer’s wages have been understated.
It is crucial that employers categorise correctly their workers and pay them and provide entitlements accordingly.