Employment law: What is the difference between employees and contractors?

Employment

Managing workers can be difficult. Employers must ensure that employees are paid their proper entitlements under the law. But what happens when a contractor claims employee entitlements? This article sets out recent High Court rulings on employee and contractor relationships, and what you need to know as a business owner.

 

What is the difference between an employee and contractor?

Employees are part of your business and work in your business. Contractors run their own business and are not part of yours. Whether a worker is an employee or contractor will affect their entitlements and your obligations under the law.

 

If your worker is an employee, you will generally need to:

 

Contractors generally look after their own tax obligations and superannuation, and are not covered by minimum employment standards.

 

Why does the distinction between employee and contractor matter?

It is unlawful for businesses to incorrectly treat their employees as contractors. Some businesses attempt to mischaracterise workers as contractors instead of employees to avoid paying tax, superannuation and employee entitlements. This lowers the labour costs of the business and gives them an unfair competitive advantage.

 

Businesses must ensure they are properly characterising their workers, as failure to do so can result in heavy penalties and charges. Further, workers may bring legal proceedings claiming they have been underpaid their employee entitlements because they were mischaracterised as a contractor.

 

What did the High Court say about employees and contractors?

The High Court recently handed down two decisions on employee and contractor relationships in CFMMEU v Personnel Contracting and ZG Operations v Jamsek. Both cases confirmed that terms of the written agreement between parties are the primary indicator of whether a worker is an employee or contractor, and subsequent conduct of the parties is irrelevant.

However, even if the contract labels the worker as a contractor or employee, this will not necessarily be the case. What is important is the substance of the contract, and whether the rights and obligations set out in the contract establish the worker as a contractor or employee. If the contract calls the worker a contractor but they are ‘in substance’ an employee, then they will have been mischaracterised.

Important factors to consider when assessing a contract to determine whether a worker is properly characterised include:

  • Who controls the work and the nature of performance: The more control you have over the worker providing the services, the more likely it is that they are an employee.
  • The extent to which the worker can be said to operate an independent business (rather than working for your business).
  • Whether the worker engaged to provide the services (being the party to the contract) is an individual or a legal entity. If the worker is an individual, they are more likely to be an employee.

 

Key takeaways for businesses

  • Written agreements are the primary indicator of whether a worker is an employee or contractor.
  • Whether a worker is an employee or contractor affects tax, superannuation and other entitlements under the law.
  • Mischaracterisation of workers is unlawful. Businesses risk penalties, charges and legal proceedings for mischaracterisation of workers.
  • Businesses should review their contracts, ensuring they are well-drafted and clearly set out the terms and conditions of the working arrangement in detail.

 

Gladwin Legal are experts in employment and contract law. We have extensive experience in drafting and reviewing legal agreements. If you would like to know how we can help, please contact us at or 1300 033 934.