We are often asked by clients “can I engage someone as a contractor rather than having a formal employee/employer relationship?”
What is the difference between an employee and an independent contractor or someone on a contract for services?
The relationship between an employer and employee is a contract of service whilst the relationship between an employer and an independent contractor is a contract for service.
The difference is not always clear, but in simple terms an employee is directed by an employer and carries out their work as directed. On the other hand, an independent contractor owns and operates their own business and has a significant level of control of how they work and when they work.
It is important to note that you must get this right and there are significant penalties, under the Fair Work Act 2009 if you misrepresent the relationship. It is referred to as sham contracting.
Employment Contracts
An employment contract is basically an agreement between an employer and employee that sets out terms and conditions of employment. It can be written or oral.
It must not provide for less than the legal minimum set out in:
- The National Employment Standards (NES)
- Awards, enterprise agreements or other registered agreements that may apply.
The employment contract cannot make an employee worse off than their minimum legal entitlements.
Independent Contractor
Independent contractors provide agreed services under a contract for those services, and they usually negotiate their own fees and working arrangements.
Generally, an independent contractors contract for service will include the following:
- Work Description and Schedule.
- Payment Terms
- Termination conditions
- Restraints
- Dispute Resolution provisions.
What do you look at to determine if it is a contract of service or a contract for services?
Generally, when a regulatory body, tribunal or court will consider this it will look at the following:
- The level of control over how and when the work is done
- Hours of work and the ability to complete the tasks in the time required
- Is this one of piece of work, is it ad hoc and/or is there an expectation of ongoing work
- Who assumes the financial risk?
- Are the tools and equipment provided or are you expected to provide them?
- What is the method of payment such as hourly rates etc.
- Are there annual leave and sickness entitlements?
- Can you work for other businesses or companies?
- Ability to work for other companies
- What is the ability to delegate or subcontract to others?
The Fair Work Ombudsman at this link provides the following very helpful table when considering the nature of the relationship.
The Australian Taxation Office also provides a very helpful guide as well here.
It is important to understand your obligations both from a Fair Work perspective and from a taxation perspective as there are significant fines and penalties that can be imposed if you get the relationship wrong.
How can FC Lawyers assist?
At FCL Lawyers we have over 25 years’ experience helping small to medium size businesses and employees in getting their legal obligations right when considering the nature of the work relationship.
Contact our team today to discuss your legal needs.
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