It is common to find employees called contractors when, in fact, they are not. Here we consider the significance of the distinction between employee and contractor and the tests that a court would consider when determining this question. 

The significance of the distinction

There are various differences in the rights of employees over contractors and there are significant differences in their respective classifications. An employer who purposely calls an employee a contractor can risk financial penalties under the Fair Work Act.

The implications of an incorrect ‘classification’ by a business can be significant. Employees are entitled to indemnification from their employer, they are entitled to various protections under the Fair Work Act, and they are entitled to superannuation.

In contrast, the rights of a contractor are limited to protections specified in the contract of engagement and under common law and statute. A contractor is responsible for their own workers’ compensation insurance 

The fundamental difference

The fundamental difference between the two forms of engagement is that employees are employed under a contract of service (contract of employment) whereas contractors are engaged under a contract for services.  But determining this distinction in practice can be complex.

There is no statutory definition of employees however certain legislation will prescribe individuals to be employees for a specific purpose i.e. for the purposes of work health and safety protections and legislation or superannuation entitlements.

It matters not that an individual has signed a contractors agreement if in fact they are an employee. 

The tests to apply

When a court considers whether an individual is an employee or a contractor it will examine the relationship between the parties as a whole and consider whether control is capable of being exercised by the employer/principal. Where significant control is capable of being exercised it is more likely than not that the relationship is one of employment. There are other tests that a court will apply including the “integration test” where a court will focus on whether a person was part of the employer’s business.

There is no definitive list of factors that will determine if a relationship is one of employment. The table below lists a range of factors that have been considered, noting that the court will examine the relationship as a whole. 

Factors typical of an employment relationship Factors typical of a contracting relationship
The employer exercises, or has the right to exercise, control over the manner in which the work is performed, the place of work and/or the hours of work. The worker exercises control as to how, when and where to perform the work.
The worker works exclusively for the employer. The worker performs work on a number of different projects for different principals, or genuinely has the right to do so.
Any tools and equipment are provided by the employer. The worker supplies and maintains his or her own tools and equipment.
The worker cannot delegate, outsource or subcontract work to one or more third parties. The worker can delegate, outsource or subcontract work to one or more third parties.
The worker appears to be a representative of the employer (eg the worker wears a badge or uniform). The worker has separate places of work and/or advertises his or her services.
Income tax is deducted from remuneration and superannuation contributions are paid by the employer. The worker is responsible for business expenses such as income tax and insurance against work-related risks/liabilities.
The employer bears the risk of loss or an opportunity to profit from the business enterprise. The worker bears the risk of loss or an opportunity to profit from performing the work.
The employer pays the worker a periodic wage or salary. The worker is paid by reference to completion of tasks.
  Note: the FW Act recognises that pieceworkers (who are employees, not contractors) can be paid by reference to completion of tasks rather than a periodic wage or salary.
The worker is entitled to paid leave (ie annual leave, personal/carer’s leave). The worker has no leave entitlements.

Source: Australian Building and Construction Commission, Sham Arrangements and the use of Labour Hire in the Building and Construction Industry, Discussion Paper, December 2010, page 21.

Further information

The Australian Government has published an online tool designed to assist in the determination of employment/ contractor which can be accessed here. We note that the results of the tool are not definitive and should be verified by a lawyer who has experience in this area. 

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