What are the differences between an Employee and a Contractor and why are they important?

Employees have different rights and obligations to independent contractors. You should be aware of all the differences prior to entering into the contract, as there can be severe consequences for a business if you use the wrong type of contract.

In general, a court will consider the totality of the relationship between the parties when deciding whether a person is an employee or an independent contractor. The High Court has developed a multi-factor test which assists businesses to answer this key question.

Multi-factor test

The High Court’s test is based upon the following key factors:

Nature of the work performed
Degree of control over the worker
Exclusivity of services
Who provides tools and equipment
Ability to delegate work
How payments are made
Who pays the taxes
Superannuation and other entitlements

Remember, all these factors should be considered together. There will not be only one deciding factor; the totality of the relationship is crucial in this regard.

What defines an independent contractor?

Generally speaking, a worker would be considered an independent contractor if they are independent in conducting their tasks, use their own tools and equipment, are paid on performance bases, are free to delegate or sub-contract work, have a separate ABN , and pay their own taxes.

What defines an employee?

On the other hand, a worker would generally be considered an employee if they are obliged to comply with company policies and directions, are allocated with jobs, use company tools and equipment, cannot delegate their work to anybody else, bear no financial risks (ie. receive a fixed salary), and the employer is liable to withhold PAYG tax.

What happens if a business uses the wrong employment contract?

If you were to choose an inappropriate contract, severe consequences may follow. For example, if a person engaged as an independent contractor is in fact an employee, the person may claim all the entitlements belonging to permanent employees (such as annual leave or personal/carer’s leave). In addition, if the role is covered by modern award or enterprise agreement, the worker may claim all the entitlements warranted under these instruments. Finally, an employer may be liable for worker’s compensation payments, for failing to withhold PAYG tax, and/or for contravening the sham contracting provisions under the Fair Work Act.

How can we help you?

We will assist you with choosing the appropriate type of contract, drafting or reviewing the contractual terms as well as inform you of your rights and obligations. We will make sure that you comply with all the legal requirements. Our team consists of Tom Maling, Matthew Bridger and Gabby Bridger, who have the knowledge and experience to provide you with expert legal support to ensure your rights and interests are protected.

We offer an initial consultation and contract review for a flat fee.