Employee vs Contractor

I have recently had a number of clients query as to whether they can hire people as a contractor rather than a employee. The difference is substantial and the consequences are significant if not done properly.

To give you an indication of the legal difference between an employee and a contractor I advise as follows:

Employee

An employee is generally a person who is employed under a “contract of service” to provide his or her personal service to the employer, usually either for a fixed or indefinite period of time. An employment relationship can be easily identified provided that most components of the relationship are significantly controlled by the employer.

This extends to what work is being performed by the employee and the manner in which it is being performed. Often, the employer also controls where and when that work is performed by the employee. The employer is also responsible for the payment of leave and superannuation payments. In summary, the employer has a significant amount of control over the employee on a daily basis.

A checklist of indicators in an employee/employer relationship include:

1. The employer has substantial capacity for control;
2. The engagement of the employee is not limited by the completion of a particular task or project;
3. The employee performs the work personally and does not delegate;
4. The employee is an individual and not a corporation or trust;
5. The employee works exclusively/substantially for the employer;
6. The employee’s hours are set by the employer;
7. Most tools and equipment are provided to the employee by the employer;
8. The employer pays all work related expenses;
9. The employer is liable for any defects in the employee’s work;
10. Professional indemnity risks are ensured by the employer;
11. The employee is entitled to pay the leave benefits.

Contractor

A contractor (C) is engaged under a “contract for service” to achieve a particular result, or to complete a particular task. When preparing a Contractor Agreement the focus is placed more on the particular outcomes which the contractor is to achieve, rather than on the nature of the relationship between the contractor and principal. The reason for this is that the principal has very little control over the manner in which the contractor goes about delivering the intended outcome, provided that the intended outcome is ultimately achieved.

Unlike employee/employer relationships, the contractor is not necessarily required to individually provide the services personally. The contractor can engage subcontractors to work with them to achieve the intended outcome.

A checklist of indicators for a principal and contractor relationship include:

1. The principal has no substantial capacity for control over the contractor;
2. The engagement is dependent on the completion of a particular project;
3. The C may perform the services by delegating them to a third party;
4. The C may be a corporation or trust;
5. The C is free to provide services to the world at large;
6. The C regulates its own hours of work;
7. The C provides its own tools and equipment;
8. The C pays its work related expenses;
9. The C is liable for all the risk of the facts or necessary corrections to services being provided;
10. The C is liable for its own professional indemnity insurances;
11. The C is paid for particular outcomes;
12. The C does not entitles to any paid leave benefits;
13. The C conducts its own business;
14. The C is entitled to work for other parties;
15. The C is liable for its own superannuation and/or other tax obligations.

The Consequences for Contractors as Employees

You are at considerable risk if you enter into a contractor relationship with someone who is actually an employee.

Your risk includes:

(a) The requirement to pay superannuation obligations;
(b) The requirement to pay PAYG obligations;
(c) The risk of not having appropriate WorkCover insurance in place and therefore being sued if the employee is injured;
(d) Workplace Health and Safety issues.

Please do not hesitate to contact me should you wish to discuss this very important issue.