Independent Contractors & your business
It is now more important than ever to make sure your contracts with independent contractors are clear and accurately capture the relationship.
Why does it matter if someone is an employee versus a contractor?
Whilst managing contractors comes with its own challenges, once you have employees, there are a large range of requirements you have to meet and keep track of, including:
- Tax and superannuation
- Work place health and safety and insurance
- Annual Leave, Sick Leave, Long service leave and other minimum workplace entitlements
Significant legal obligations can flow from engaging employees. If you aren’t aware of the requirements and you’ve misclassified your workers, then you could be hit with a claim for a large sum for entitlements or other payments from past or current workers.
Here are some of the legal obligations for employees and contractors.
Comparing tax and superannuation obligations
| Employee | Contractor |
| If your worker is an employee you’ll need to: – withhold tax (PAYG withholding) from their wages and report and pay the withheld amounts to us – pay super, at least quarterly, for eligible employees -report and pay fringe benefits tax (FBT) if you provide employee with fringe benefits.Report and pay for Payroll Tax (State) if your wages meet the min thresholds. | If your worker is a contractor: – they generally look after their own tax obligations, so you don’t have to withhold from payments to them unless they don’t quote their ABN to you, or you have a voluntary agreement with them to withhold tax from their payments -you may still have to pay super for individual contractors if the contract is principally for their labourYou don’t have FBT obligations. |
Comparing workplace health and safety obligations
Employers have a duty to protect the health and safety of workers while at work by providing and maintaining a working environment that is safe and without risks to health.
Employers owe the same duty to independent contractors working at the workplace and contractors’ employees, but only for matters over which the employer has, or should have, control.
| Employee | Contractor |
| Duties to employees and contractors – Eliminate risks or reduce risks as far as is reasonably practicable by: providing and maintaining safe plant so that all machinery, equipment and tools are suitable for their purpose, guarded where necessary and maintained in a safe condition – arranging safe systems of work, for example, how work is organised, including work processes and safe operating procedures, work arrangements, the pace of work and procedures to prevent and manage fatigue, occupational stress and violence – maintaining the workplace in a condition that is safe and without risks to health, including space, layout, security, lighting, ventilation and noise control – putting in place procedures for the safe use, handling, storage and transport of plant and substances – providing adequate facilities for the welfare of workers, such as drinking water, toilets, eating areas and first aid – providing workers with the information, instruction, training and supervision necessary for them to do their jobs safely and without risks to health Other duties: – Duties to monitor health of employees and monitor workplace conditions – Duty to provide information about health and safety and keep information and records on WHS – Give names of people in the organisation that workers can contact to make an enquiry or complaint about health and safety – Engage people with OHS qualifications to advise on employees’ health and safety. – Duty to not put other people at risk (vistors / general public) | Employers owe the same duty to independent contractors and contractors’ employees, but only for matters over which the employer has, or should have, control. |
Comparing tax and superannuation obligations
| Employee | Contractor |
| If your worker is an employee you need to comply with the 11 minimum entitlements: Maximum weekly hours Requests for flexible working arrangements Offers and requests to convert from casual to permanent employment Parental leave and related entitlements Annual leave Personal/carer’s leave compassionate leave unpaid family and domestic violence leave Community service leaveLong service leave Public holidays Notice of termination and redundancy pay Fair Work Info Statement and Casual Employment Info Statement | If your worker is a contractor, these workplace entitlements will not apply. |
What’s the difference between an employee and a contractor?
Whilst the multi factor test is not top of the list anymore, it is still useful background to creating appropriate contracts and resolving unclear contracts (and is likely to play a part if there is no contract).
Remember, the High Court in Personnel and Jamsek has now held that to determine whether a person is an employee or independent contractor, we first consider look to the contract (contracts are queen) and the legal rights and obligations that were agreed in the contract
- Only if the contract is unclear do we move to the multi factor test (and the indicia)
Differences between an employee and an independent contractor
If the contract is not clear (or if *gasp* there is no contract!) then to assess a series of indicators, (which lawyers like to get fancy and call ‘indicia’). These indicators help decide whether a worker is a contractor or an employee.
There isn’t a hard and fast rule, the indicators are a guide, like stacking up pieces of evidence on each side of a scale. The ultimate question is overall whether the worker is acting for another or on their own behalf.
At a high level:
- Independent contractors work for themselves, are their own boss, send invoices to clients for work they do.
- Employees work in someone else’s business, employer controls how, where and when they do their work, and pays them a wage
Indicators of Employee and Independent Contractor
| More likely to be an employee | More likely to be an independent contractor |
| Employee is paid by periodic wage or salary. | Worker provides invoices after the completion of tasks. |
| Employee works solely for the employer. | Worker performs work for others, or is genuinely entitled to do so. |
| Employer advertises the goods or services of its business. | Worker has a separate place of work and or advertises his or her services to the world at large. |
| Employer can determine what work can be delegated or sub-contracted out and to whom. | Worker can delegate or sub-contract any work to other persons to complete. |
| Employer deducts income tax from remuneration paid. | Worker responsible for own tax affairs. |
| Employer exercises, or has the right to exercise, control over the manner in which work is performed, the location and the hours of work etc. | Worker controls how work is performed. |
| Employer has the right to suspend or dismiss the worker. | Contract may be terminated for breach. |
| Employer provides a uniform or business cards. | Worker wears their own uniform or other clothing of their choice. Worker has own business cards. |
| Employer provides and maintains significant tools or equipment. | Worker provides and maintains significant tools or equipment. |
| Employer provides paid holidays or sick leave to employees. | Worker does not receive paid holidays or sick leave. |
| The employee does not spend a significant portion of their pay on business expenses. | The worker spends a significant portion of their remuneration on business expenses. |
| The work does not involve a profession, trade or distinct calling on the part of the employee. | The work involves a profession, trade or distinct calling on the part of the worker. |
| The work of the employee creates goodwill or saleable assets for the employer’s business. | The worker creates goodwill or saleable assets for their own business. |
Source: Adapted from indicia in Abdalla v Viewdaze Pty Ltd t/a Malta Travel[i]
Further information
- Check the differences between employees and contractors on the Australian Taxation Office website – this will help you to work out your business’s tax and super obligations.
- Read the Fair Work Ombudsman’s independent contracting info for the differences for workers – you’ll also find information on minimum pay, working conditions and protections
- ATO’s Super Guarantee Tool
- Fair Work Ombudsman: https://www.fairwork.gov.au/find-help-for/independent-contractors
| Please reach out if you have questions about your independent contractors or your business. For an in depth look and to find out if you need to look at your contracts, our friends at Checklist Legal have provided this document for our wonderful clients. Guest Article by Verity White | Legal Director & Chief Contract Enthusiast Checklist Legal| Creating contracts clients love |
