Australia: What is the difference between employees and contractors?

As a business owner, understanding the correct entitlements you owe to your workers is essential. Not only is it a legal obligation, but it minimises the risk of your workers bringing an employment claim against you. Importantly, your obligations will differ depending on whether your workers are employees or contractors. It may not always be clear which is the case. 

Previously, determining the difference between employees and contractors involved a close look at the whole relationship between the individual and employer. Indeed, this is still essential. However, changes in the law now emphasise that the contract between you and your workers is the most important element. Likewise, looking at your employment contracts should be the starting point. This article will outline the key differences between employees and contractors and provide some helpful tips to protect your business.

Working Hours

Unless they are a casual employee, employees usually have regular and defined working hours. On the other hand, contractors usually have the freedom to decide what hours they work to complete their designated tasks. However, a contractor agreement may specify certain work hours.

Control Over Work

Employees typically work under the standards and directions their employers set out for them. Conversely, contractors have a high degree of control over how they complete their work, including the methods they use to complete their work.

Commercial and Financial Risk

Employees face no commercial or financial risk over their work, as it is the employer who ultimately bears the responsibility. On the other hand, contractors assume the risk of making and losing money. Likewise, they will be responsible for any liability or defects. As such, it is common for contractors to have their own insurance.

Expectation of Work

Additionally, employees, including some casuals, can expect regular and systematic work. However, your business will usually hire contractors for specific tasks and will not generally engage them for further work beyond this. 

Method of Payment

When paying your employees, they typically receive routine payment, whether weekly, fortnightly or monthly. This payment is in exchange for their time, and you pay them irrespective of their performance. In contrast, your business pays contractors to complete the work you have quoted. They are paid through invoices and maintain an Australian Business Number. Likewise, the payment is in exchange for achieved results.

Equipment and Tools

Generally, your employees will benefit from your business providing tools and equipment, or at least, an allowance for them. However, contractors are responsible for supplying their own equipment and tools to complete the work.

Superannuation

Employees are entitled to superannuation payments (which you as their employer pays) to their nominated super fund. Conversely, contractors will have to manage their own superannuation payments in most cases. However, there are some exceptions to this.

A contract may be considered 'wholly or principally for labour' where the contractor:

• is paid wholly or principally for their personal labour and skills;
• is paid for each hour of work, rather than to complete a specific project; or
• performs contract work personally.

Tax

Further, most employees have their tax deducted through arrangements like pay-as-you-go (PAYG). Meanwhile, contractors have to pay their own income tax directly to the Australian Taxation Office (ATO). Further, a contractor must pay their own Goods and Services Tax (GST) to the ATO in some circumstances. 

Leave Entitlements

Employees also benefit from leave entitlements, like annual leave or carer's leave. Likewise, your casual employees receive casual loading instead of these entitlements. In contrast, contractors receive no leave benefits. This makes it even more essential that independent contractors consider obtaining their own insurance.

Right to Delegate Tasks

Notably, employees cannot delegate their duties. Sometimes, they may delegate to other employees, but they are largely responsible for their own work. On the other hand, contractors have powers of delegation and may choose to subcontract their work (unless you prohibit this arrangement under the contractor agreement).

How Do I Protect My Business? 

The above factors are helpful in distinguishing between employees and contractors. Still, it is vital to ensure that the relevant written agreement clearly and appropriately reflects the true nature of the relationship between you and a working individual. This is now more important than ever.

Courts have previously assessed the conduct of parties before and after entering into a contract when determining whether they are employees or contractors. However, in ZG Operations & Jamsek  and CFMMEU v Personnel Contracting,  the High Court of Australia significantly departed from this long-adopted practice. Instead, the Court considered the written contract as paramount in determining whether an individual is an employee or contractor, unless the contract itself is a 'sham'.   

In light of these developments, it is prudent to revisit your current agreements and closely consider any potential working arrangements. Indeed, it is also best practice to engage an employment lawyer to assist you in refreshing or drafting your employment or contractor agreements.   

What Happens if I Misclassify a Worker? 

The significant differences between the entitlements you owe to employees and contractors mean it is critical that you do not misclassify your workers. Likewise, beware of the consequences if you engage in sham contracting. The penalties for misclassifying an employee as an independent contractor are severe, with potential penalties for both you and your business.

Key Takeaways

As an employer, it is essential that you understand the distinction between whether a worker is an employee or a contractor. Indeed, the difference has a significant impact on the worker's entitlements. There are key factors you should assess when distinguishing an employee from a contractor, such as their:

• working hours;
• control of work;
• commercial and financial risk;
• expectation of work;
• method of payment;
• superannuation; and
• tax, amongst other factors.