Employee or Contractor?| Fairwork Online

Employee or Contractor?

Employers at times may decide to engage professionals as contractors (rather than employees) for specialised projects that may require a certain level of skill.  It is common for such an arrangement to later continue on an ongoing basis after the original project is complete, which may then raise legal issues and possibly create obligations on the part of the employer that it did not envisage when the contractor was first engaged.

This article will assist you in determining whether a person is an employee or a contractor at law, and it will also identify the possibly consequences for an employer if the arrangement is not clearly defined from the beginning.

Factors suggesting the person is an EMPLOYEE
Below are a number of factors which are common to an 'Employer – Employee' relationship, and if they exist, will suggest that the person is an employee.

Note that the existence of any of these factors will merely suggest that the person may be an employee.

• The person is paid by the hour or day (i.e a carpenter paid $30 an hour), or on a piece rate basis (i.e a bricklayer paid per brick laid)
• The person is paid other 'employee-type' benefits (such as a meal allowance /  travelling allowance, annual leave or superannuation)
• The person is instructed when to start and finish work (i.e 9:00am start, 5:00pm finish, with a 45 minute break)
• The person is required to wear a uniform with the employer's business logo on it
• The person is at times required to do 'unskilled' work which is ancillary to their area of expertise
• Before paying the person, the employer deducts taxation for PAYG purposes
• The employer has the person covered under the employer's own workers compensation policy

Factors suggesting the person is CONTRACTOR
Below are a number of factors which are common to a 'Principal – Contractor' relationship, and if they exist, will suggest that the person is a contractor.

Note that the existence of any of these factors will merely suggest that the person may be a contractor.

• The person carries on a registered business (with an ABN), as a sole trader, a partnership, or a company
• The person is registered for GST purposes if their business income exceeds $75,000 per year
• There is a written contractor agreement in place between the person and the employer
• Generally, the person is paid to complete a project (a fixed amount to achieve a fixed result), and is paid a lump sum and / or progress payments upon submitting tax invoices to the employer
• Upon receiving initial instructions from the employer, the person has total control over how the work is carried out, and how the project is completed
• The person may also employ his or her own employees or engage contractors to carry out the work and complete the project, or has the power / authority to do so
• The person has in place their own workers compensation and / or personal accident / sickness insurance policy, public liability / professional indemnity insurance policy (if applicable)
• The person accepts liability for any work they carry out that is defective or unsatisfactory, and has an obligation to rectify such work at his or her own cost
• The person also does work for other businesses / employers, and may also advertise to the public (including through a website)

Summary
Generally speaking, a person who is seen by the world as:

A. running their own business is likely to be a CONTRACTOR

B. being part of the employer's business is likely to be an EMPLOYEE

What are the possible consequences for the Employer?
Where a 'contractor' is later deemed by law to actually be an employee, the employer may be liable to make payments in the following ways:

• Employment / Award Entitlements - annual leave, sick leave, penalty rates, overtime rates and allowances
• Superannuation – 9% of all contract fees paid
• Unpaid Workers compensation premiums
• PAYG Taxation – particularly where the person has failed to pay the correct amount of income taxation
• Payroll Tax – the contract fees paid to the person will be included in the business' payroll for tax purposes

The above demonstrates how important it is for employers to very clearly define the arrangement from the beginning, to avoid serious legal implications arising at a later time.