Incorrectly engaging a worker as an independent contractor can have serious implications for business owners and can leave new graduates (and inexperienced workers) exposed. 

It is crucial for employers to accurately determine the employment status of individuals to ensure compliance with labour laws and to provide adequate protection for both the workforce and the business.

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 holistically to determine whether an employment or contractor’s relationship exists. 

Key factors include the following.

Control

Arguably the defining feature of a genuine contractor’s relationship is the level of control afforded to the contractor. 

In an employment relationship, the employer typically dictates when and how the employee works, whereas an independent
contractor has the necessary experience, expertise and autonomy to operate in a manner that aligns with their preferences. 

This may include subcontracting their own employees to perform work for them. 

Ultimately, an independent business should have the flexibility to work when and how the contactor chooses, while recognising that certain parameters set by the principal, such as business trading hours, may still have some bearing.

Method of payment

Employees typically receive fixed compensation, such as a salary or an hourly/weekly rate, whereas independent contractors commonly bill for specific tasks or projects by submitting invoices. 

To facilitate this, the independent contractor uses their own ABN or ACN.

It is important to note that simply having an ABN or ACN does not automatically mean that a person is an independent contractor.

Use of equipment

Using personal equipment, tools or machinery for tasks is often associated with an independent contractor’s arrangement.

This is not to say, however, that not having personal equipment automatically makes a worker an employee. 

Some industries and professions require the use of large or expensive equipment, which is often provided by the proprietor for reasons of practicality.

Leave

Leave, whether paid or unpaid, is typically an entitlement reserved for employees. 

A genuine independent contractor should not be locked into an arrangement where they have to request leave to ‘take time off’. 

Again, they should retain the flexibility to autonomously decide when they are available or unavailable to work.

Ultimately, determining whether a worker is truly an employee or independent contractor hinges on whether these (and other)
factors indicate more strongly that an employment or contracting relationship exists.

Who can work as an independent contractor? 

Provided that 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, they should be engaged as an employee and not as an independent contractor.

In the beginning stages of a career, a worker’s focus should be on developing their experience and refining their expertise.

With minimal experience, a new graduate will benefit from tailored guidance. 

However, if they’re hired as an independent contractor, the responsibility for arranging such support falls on them. 

This is not conducive to employee development and is unlikely to yield positive results for the business.

Additionally, preoccupation with running one’s own business—which is essentially the case for an independent contractor—is not ideal in the early phases of a career. 

It not only shifts attention away from developing relevant skills, but also raises the possibility of exploitation because individuals must navigate financial and legal obligations. 

This becomes particularly challenging when dealing with someone likely to have more business acumen by way of experience.

When the new graduate has gained some experience as an employee, transitioning to an independent contractor role may then become a more realistic option. 

At the outset, however, employment is the appropriate choice.

The ramifications of getting it wrong

The Fair Work Act 2009 explicitly prohibits the misclassification of an employee as an independent contractor, labelling the practice ‘sham contracting’. 

This safeguard extends to actions such as dismissing an employee with the intention of re-engaging them as a contractor and making false or misleading statements to persuade an employee into entering a contract for services when the role will remain similar to or the same as that of an employee. 

Corporations found to have intentionally established a sham contracting arrangement can face penalties of up to $93,900 per contravention and individuals may face a penalty of $18,780.

If a contractor is found to be an employee, the business may also be liable for back-paying employee entitlements such as leave and superannuation. 

From an Australian Taxation Office perspective, penalties can include a PAYG withholding penalty and super guarantee charges. 

Note that it is possible for workers to be genuine independent contractors but still ‘employees’ for superannuation purposes.

For further information, speak to your accountant or the Australian Taxation Office.

Getting it right

It is never too late to check your arrangements with workers to ensure that they are legally compliant and valid. 

The HR in Practice service has resources and checklists available to assist with correctly classifying your workers and strongly recommends seeking further professional advice, including:

• 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.

Content supplied. 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 on 1300 138 954 or hrinpractice@australian.physio or click here to access the full suite of online resources. For more information about joining the APA Business Group, email info@australian.physio or call 1300 306 622.

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 on 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 of the contents of this publication. ©Wentworth Advantage Pty Ltd. 2024