Workplace disputes often centre on whether someone is an employee or an independent contractor. What is the difference and why does it matter?
Participants in the workforce do so in two ways as an employee or an independent contractor. Whether the law sees you as an employee or an independent contractor has an impact on several important aspects of your working life. If you are an employer understanding who are your ‘employees’ is equally important as it will dictate the extent of your responsibilities. For these reasons the true nature of workplace relationships can often be the subject of a dispute.
Who is an employee?
Generally, an employee is employed by a business to provide their labour. Employees can be employed on a permanent, casual, or fixed-term basis, working either full-time or part-time hours. Employees owe duties of fidelity and good faith to their employer.
Who is an independent contractor, and how is it different to being an employee?
An independent contractor is a person who contracts to others in order to provide particular services or complete a particular project. A contractor is different to an employee because the contractor must run their own independent business, separate from the person who engages them. For that reason, a contractor can service many different clients (often at once) and can advertise their services to the public at large.
Are employees and contractors treated differently in the workplace?
Yes, there are several differences, including:
- Minimum pay rates and minimum working conditions and unfair dismissal and unlawful termination protection – the national workplace relations system is a collection of legislation that applies to most employees and employers in Australia. It includes the Fair Work Act 2009, the National Employment Standards, registered agreements, and awards. The national workplace relations system sets out the minimum employment entitlements that must be provided to all employees but not contractors.
- PAYG withholding – businesses must withhold and remit tax on behalf of employees under the PAYG withholding scheme, but no similar obligation exists for payment of contractors.
- Payroll tax – if a business pays wages which are liable to payroll tax over the relevant State monthly threshold, they must register for payroll tax. If they then have an annual wages bill of over the annual threshold, then they must pay payroll tax. The amounts paid to a true independent contractor are generally not included as wages for payroll tax purposes.
- Superannuation – businesses must pay the Superannuation Guarantee (which is currently 9.5% of the employee’s annual pay) to their employees’ superannuation funds on their behalf. Contractors must make their own superannuation contributions.
- Payment for leave –employees are entitled to receive payment for leave, including sick leave, annual leave, and long service leave. Contractors do not have an entitlement to leave.
- Workers’ compensation cover – businesses are responsible for taking out insurance against loss caused by injuries sustained by employees in the course of their employment. Contractors are required to take out their own insurances.
If a business owner mischaracterises a worker and fails to meet their obligations to an employee, there are serious financial consequences in the form of compensation and statutory penalties.
Employee or a contractor?
Until recently, when the nature of a workplace relationship was disputed, the Courts applied a ‘multi-factorial test’ that considered the day-to-day reality of the relationship and the post-contractual conduct of the parties over any written agreement stating the nature of the relationship to be either employment or contractual.
In the recent decisions in Construction, Forestry, Maritime, Mining and Energy Union & Anor v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations & Anor v Jamsek & Ors [2022] HCA 2 the High Court acknowledged the problematic nature of the multi-factorial test and instead confirmed the primacy of contractual terms when characterising the true nature of the workplace relationship.
What does this mean? Well, in situations where the parties have comprehensively and clearly set out the terms of their relationship in a written agreement, the characterisation of the relationship will be determined by reference to the rights and obligations of the parties under the contract, not necessarily how the parties have described themselves. This means, unless the contract is a sham or invalid for some other reason or its terms have been varied or there has been conduct giving rise to an estoppel or a waiver, there is no need to take an expansive approach and look beyond the contractual terms at the parties’ subsequent conduct.
Action required
Going forward, this new ‘contract focused’ approach puts the written agreement between businesses and their workers front and centre. Now is a good time for businesses to make sure:
- You have written contracts with your workers setting out both the nature of the relationship and your respective rights and responsibilities.
- You ensure the description of the work relationship is consistent with each party’s rights and responsibilities.
- If you think that you have mischaracterised any existing work relationships, then consider how you will address your financial and legal obligations to affected workers.
Alternatively, if you think you have been misclassified as an independent contractor, seek advice about the true nature of your role and to act if you have been missing out on workplace entitlements.
How we can help
It is good practice for business owners to annually reassess their workforce and optimise their employment arrangements. If you need help reviewing or preparing suitable employment contracts, making decisions about your workforce, or dealing with a dispute, call JFM Law Lawyers on (02) 9199 8597 or email us on wehelp@jfmlaw.com.au
If you are a worker and think that you have been misclassified as an independent contractor and have been missing out on workplace entitlements, call JFM Law Lawyers(02) 9199 8597 or email us on wehelp@jfmlaw.com.au and let us help you to get your entitlements.
The information contained in this post is current at the date of editing – 29 August 2024.