How do you tell the difference?
When deciding to classify a worker as an employee or independent contractor, you may ask, “does it really matter?” – I can assure you, it does.
As an employer, your obligations to employees differ from your obligations to independent contractors. A variety of factors need to be considered when deciding whether the worker is an employee or an independent contractor. The factors to consider are:
- Control: employers control and direct employees whereas independent contractors have control over how they work and may hire others to assist them.
- Work hours: other than casuals, employees work regular hours whereas independent contractors work the hours agreed upon to complete a job.
- Expectation of work: employees have an expectation of ongoing work whereas independent contractors do not, instead they are hired for a specific time or task.
- Financial risk: employers have financial risk, not employees, whereas independent contractors have financial risk, and may have their own insurance.
- Superannuation: employers make superannuation contributions for employees whereas independent contractors make their own superannuation contributions.
- Tax: employers deduct income tax for employees whereas independent contractors deduct their own tax.
- Pay: employees are regularly paid a wage or salary whereas independent contractors invoice for work and have their own Australian Business Number (ABN).
- Leave entitlements: employees receive paid leave entitlements whereas independent contractors do not.
- Tools and equipment: employers generally provide the tools and equipment for employees whereas independent contractors supply their own.
It is important to understand the characteristics and differences between employees and independent contractors in order to avoid sham contracting. Sham contracting is when an employer attempts to disguise an employment relationship as an independent contracting arrangement, usually to avoid their responsibility for employee entitlements.
The Fair Work Act 2009 provides serious penalties for sham contracting. In order to avoid penalties, and save your organisation in the long run, we recommend reviewing your workers’ contracts keeping in mind the factors that determine whether the worker is an employee or independent contractor.
This will help you accurately assess whether your workers have been defined correctly under the Fair Work Act.