This is the question which is plaguing businesses across Australia and if they get the question wrong, it could lead to significant costs that could be fatal to the business.
Generally an employee is someone who is employed by a business to provide their labour and an independent contractor is a person who contracts to others to provide services and to achieve a particular result or complete a particular project.
If a business engages a person who they believe is a contractor (because they have an ABN and provide Tax Invoices) but turns out to be an employee under the below guidelines, the business could be liable for;
• Back-pay due to minimum pay rates, working conditions & leave entitlements
• Superannuation entitlements
• Unfair dismissal
Unfortunately, there is no black and white definition of employee or independent contractor. Instead, the courts have provided the following main factors to consider:
• CONTROL TEST:
A person is an employee if they are subject to the employer’s commands such as hours, place of work and how the work is to be performed.
• RISK TEST:
The more commercial risk assumed by the person, the more likely that person is an independent contractor. Generally, independent contractors are liable for any injury or defect arising from the work.
• DELEGATION TEST:
Contractors who are prevented from delegating their work to others are more likely to be an employee.
• CONTRACTS FOR TASKS VERSUS CONTRACTS FOR LABOUR:
Independent Contractors complete a specified task, whilst employees are more likely to be engaged on an ongoing basis even if it’s a fixed term.
If you are unsure whether your contractor is actually an independent contractor, we recommend you use the ATO’s Employee/Contractor Decision Tool at http://www.ato.gov.au/Calculators-and-tools/Employee-or-contractor/ or contact our office.
To provide the best protection against Contractors being classified as Employees, we recommend Contractors operate via a Company, Trust or Partnership and the Contracting Agreement does not specify a particular individual to complete the Task.