Independent contractor or employee?
Incorrectly engaging a worker as an independent contractor can have serious implications for business owners. It is imperative to understand the distinction between an independent contractor and an employee, for the sake of the business owner and worker alike.
Contractor versus employee
While there is no single factor that comprehensively differentiates an employee from an independent contractor, the nature of the relationship is looked at more holistically to determine whether an employment or contractors’ relationship exists.
Some of these key factors are listed below.
Arguably the most defining feature of a genuine contractors’ relationship is the level of control afforded to the worker.
In an employment relationship, the employer is generally in charge of organising workers’ schedules, whereas an independent contractor has the necessary experience, expertise, and autonomy to be able to work in a fashion that suits them.
This may include having the ability to subcontract or engage their own employees to perform work for them.
Ultimately, an independent contractor should have the flexibility to work when and how they choose, acknowledging that the owner will still have some bearing over this (eg, business trading hours etc).
Method of payment
Employees are usually payed a fixed rate such as a salary, or hourly/weekly rate.
Independent contractors generally submit invoices for specific work performed or projects.
To facilitate this, the independent contractor operates using their own ABN or ACN. However, simply having an ABN or ACN does not automatically mean the worker being engaged is an independent contractor.
Use of equipment
A worker using their own equipment/tools/machinery to perform certain tasks is indicative of an independent contractor.
This is not to say, however, that a worker who does not provide or use their own equipment is therefore an employee, as certain industries and professions require the use of large or expensive equipment which is often provided by the proprietor for reasons of practicality.
All forms of leave, either paid or unpaid, are entitlements generally only afforded to employees.
A genuine independent contractor should not be locked into such an arrangement whereby they have to request leave to take time off.
Again, they should have the flexibility to decide when they are available or not available to perform work.
Determining whether a worker is truly an employee or independent contractor will come down to whether the factors, such as those mentioned above, indicate more strongly that an employment or contracting relationship exists.
Who is suited to work as an independent contractor?
Provided the nature of the relationship is consistent with a contracting arrangement, any individual may choose to work as an independent contractor.
The exception to this rule is new graduates. If you are considering engaging a new graduate, or you are a recent graduate beginning your career, you should be engaged as an employee and not as an independent contractor.
At the beginning stages of a career as a health professional, a worker’s focus should be on developing their clinical experience and refining their expertise.
With minimal experience, a new graduate will benefit from tailored guidance and training—which, if engaged as an independent contractor, will be their responsibility to bear.
This is not conducive to development as a health professional and is unlikely to yield positive results for the business.
In that same vein, preoccupation with running one’s own business—which is essentially the case for an independent contractor—is not ideal during the beginning stages of one’s career.
Not only does it take the focus off developing clinical skills, it increases the possibility for exploitation as focus must also be centred on understanding financial and legal obligations with somebody who is likely to have more business acumen simply by way of experience.
After some time working as a clinician, it may be a more realistic prospect to engage an individual as an independent contractor. However, at the outset, employment is the appropriate choice.
What are the ramifications of getting it wrong?
The Fair Work Act 2009 provides that it is prohibited to incorrectly classify an employee as an independent contractor, deeming this to be ‘sham contracting’.
This protection includes dismissing an employee for the purposes of re-engaging them as a contractor, and making false or misleading statements to an employee to persuade them to enter a contract for services when the role will remain similar or the same to that of an employee.
Businesses who are found to have intentionally established a sham contracting arrangement can face penalties of up to $66,000 per contravention.
At the same time, if a contractor is found to be an employee, the business may be liable to back-pay leave and other employee entitlements.
From an Australian Tax Office (ATO) perspective, penalties can include a PAYG withholding penalty, and super guarantee charges.
Getting it right
It is never too late to check your arrangements with workers to ensure they are legally compliant and valid.
The HR in Practice service has resources and checklists available to assist with correctly classifying your worker.
Also, the ATO has developed a useful tool (found on their website) to help determine whether your worker is a contractor or an employee.
For further information, it is strongly recommended to seek further professional advice. This should include:
- guidance from an accountant regarding your tax and super obligations
- information from your insurer regarding your workers compensation obligations
- advice from a solicitor who is familiar with employment law regarding the contractual arrangements with your workers.
The HR in Practice specialist workplace relations and work (occupational) health and safety advisory service is operated by Wentworth Advantage. APA Business Group Premium Principal members can contact the HR in Practice service by phone, email and online chat Monday–Friday, 8.30am – 5.30pm AEST, and can visit australian.physio to access the full suite of online resources.
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Disclaimer: The material contained in this publication is general comment and is not intended as advice on any particular matter, nor should it be relied upon as a substitute for legal or professional advice. Wentworth Advantage Pty Ltd expressly disclaim all and any liability to any persons whatsoever in respect of anything done, or omitted to be done, by any such person in reliance whether in whole or in part upon any contents of this publication.
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