Sometimes a person engaged as a contractor may in law be an employee. The line that divides employees from contractors is grey and shifting. Application of Awards and unjust dismissal laws, pay and leave entitlements, and tax and insurance issues all depend on which status applies. This Plain English Guide answers some of the commonly asked questions about defining the relationship of employee vs. contractor.
What is the difference?
An employee is someone engaged by an employer to provide “service” ie to do generally as the employer requires, under the employer’s management and direction.
A contractor, on the other hand, is engaged by a business to provide “services” ie to perform particular tasks as required by the business but without the same characteristics of permanency and control as expected in an employment relationship.
Why does it matter?
Being an employee carries with it a wide range of employment entitlements such as annual leave, long service leave and parenting leave, and may result in the application of award conditions of employment. The employer will have the primary responsibility for taking out insurance and paying tax. The employer is much more likely to be liable for the acts of an employee than a contractor.
Significant obligations therefore depend on whether the person is correctly categorised as an employee or contractor. If someone you regard as a contractor subsequently claims to have been an employee over many years, with substantial accrued employment entitlements, the financial consequences and possible flow-on to other similar “contractors” can be disastrous. Or the tax authorities may dispute your classification and argue that your business is liable for extra group tax or payroll tax, as the person you treated as a contractor was “really” an employee.
What is the test?
Court cases have identified a grab bag of factual matters which help to decide whether someone is a contractor or an employee. These include:
- whether the person provides tax invoices;
- whether the person takes responsibility for their own tax deductions and arranges their work-related insurance;
- whether there are any paid leave arrangements;
- the extent to which the person has other business activities and is free to organise his or her time and work arrangements as he or she wishes;
- the degree of control which the business exercises over the person’s activities (the greater the control, the more likely the person is an employee);
- whether the business or the person are responsible for the supply of equipment (supply by the person rather than the business suggests the person is a contractor, at least if the equipment is substantial);
- whether the person is building up marketable goodwill in their own name;
- whether the person appears to outsiders as an independent person or as part of the business (eg business cards, uniforms, stationery);
- whether the person was transformed from an employee into a contractor (willingly or under coercion) at some time;
- whether the contractor is an individual, or a company supplying the services of an individual (and perhaps other employees).
How do you weigh up these factors?
This is a very difficult exercise, as reasonable minds can differ, in a given set of circumstances, as to whether the person is on the “contractor” or the “employee” side of the line. The dividing line is grey, and it is very difficult to predict the decision a judge might make when faced with all of the factual material in a particular set of circumstances. There has been a case where one court has found that a courier was a contractor for the purpose of a tax case, but then another court found a different courier engaged by the same business was an employee for the purposes of an injury claim by a member of the public against the business.
There is always a degree of risk that the judgment a business makes as to the status and categorisation of the people it engages could be overturned subsequently. Certainly the title given to the person does not decide the question nor do the formal matters such as tax and leave.
What should businesses do to manage these issues?
While it is very difficult to anticipate what a court will decide when faced with this problem, it is possible to identify risk factors, and to identify matters which might increase the likelihood of the person being categorised as an employee or as a contractor (whichever is desirable for the person or the business). So a business can make deliberate arrangements with this issue in mind, to increase the likelihood of the legal categorisation matching what the business thinks the person’s status should be.
It is also important to make sure that all contracts and other documents, and the systems and operations of the business, are consistent with the desired status. Whichever side of the line you want to be on, it is critical to have a clear written contact to govern the relationship, and that you act consistently with the contract and status intended.
Liability to pay superannuation, PAYG tax, workers compensation and payroll tax can depend on the ‘employee or contractor?’ issue, but the rules are complex and businesses need to be aware of the possible liabilities even if the person is a contractor.
How can Coleman Greig help you?
Coleman Greig’s employment lawyers can assist you by analysing contractor/employee issues, and can advise you on the factors which are likely to guide categorisation in one direction or the other, and as to the steps that you can take to try to ensure that the outcome is the desirable outcome from your point of view. They can also draft agreements between you and contractors or employees clearly covering the important issues.
For more information on how our employment law lawyers can help you work out if you have employees or contractors, please contact our team.