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Employee vs Contractor – Spot the Difference!?

Featured Article written by LY Intern Lan Mai

There are various factors to consider when distinguishing between an employee and contractor relationship.

So how can employers go about preventing misclassification or the risk of sham contracting whereby employers intentionally or recklessly tell employees that they are independent contractors when in fact they are employees?

Our Legally Yours “Hub Talk” on ‘Employer vs Contractors – Spot the Difference!’, featuring Helen Allard from Clearpoint Legal, will unravel key considerations into clarifying the relationship.

Article Summary Points:

Classification of Employer vs Contractor Relationship

Employers should be cautious not to misclassify the relationship between an employee and contractor to avoid breaching obligations under the relevant law including the Modern Awards and Fair Work Act, taxation and superannuation which could lead to various ramification for the business.

The underlying difference between the relationship is the contractual agreement between the parties generally with employees being employed under a permanent, fixed, or casual basis while contractors are hired for specific project or task.

Generally speaking, the totality of the relationship and the multi-factor test is used to determine the relationship which includes factors such as:

  • Intentions of the Parties: Circumstances that manifest an intention to create an employment relationship may include employment contract, Tax File Number (TFN) declaration and completion of superannuation fund nomination. On the other hand, the negotiation of contract or service agreement and provision of an ABN is an intention to only engage in a contractor relationship.
  • Ability to Subcontract: An employee cannot engage others to do work on their behalf, rather they must perform the work themselves. The contractor however has the ability to subcontract their service to others.
  • Degree of Control: It is the employer who has control over the work performed by their employees, while a contractor has greater control of the work they perform.
  • Responsibility and Risk: Employees do not bear the financial risk of the business. Contractors are however liable for poor work performance, though they would usually have appropriate level of insurance to cover themselves.
  • Tools & Equipment: Employees are generally provided with tools and equipment to perform their tasks, or an allowance is given to cover the cost. Whereas contractors are responsible for their own tools and equipment.
  • Hours of Work: Employees work are based on standard hours (except casual employees) and contractors are based on a specified time as agreed by the parties.
  • Continuing Work: There is an expectation of ongoing work for employees while contractors are only engaged for a specific task.
  • Tax: Employees’ tax is deducted directly under the PAYG withholding system and contractors pay their own tax under PAYG Instalments.
  • Superannuation: Contractors are responsible to pay their own superannuation while employers are responsible to pay their employees superannuation.

These multi-factors do not however form the entire picture, following recent High Court cases, greater importance is now placed on the terms of the contract which the parties have agreed to rather than the conduct itself.

To get in contact with Helen Allard from Clearpoint Legal, please visit clearpoint.legal.

This Featured Article post does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area.

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