Contractor or employee

Contractor vs employee – Are your staff employees or contractors?

In the age of ‘just in time’ and the ‘flexible labour force’ a lot of employers have been tempted to get rid of employee overheads altogether and supply the labour needed through ‘contracts for services’ or labour-hire arrangements. So, when is someone an employee and when are they a contractor?

Labour-hire workers are often still employees, just not yours, and so you pay an agreed price per day to their employer, the labour-hire agency. Warning on labour-hire though: The High Court has recently found an employer who used labour-hire arrangements to avoid paying employee entitlements was liable along with the labour-hire agency for sham contracting, so you can’t assume that using labour-hire will protect you from blame. Obviously, labour-hire will often be unsuitable if you need workers with particular skills or experience, but the use of skilled contractors may fit the bill.

However, the law takes a dim view of ‘sham contracting’, which is the use of contractors who are in fact employees. Contractors have far fewer industrial entitlements than employees do, so there are provisions in the Fair Work Act 2009 which protect employees from being arbitrarily converted into contractors, and provisions which disallow sham contracting to provide labour.

The Fair Work Act makes it illegal to tell a worker, either existing or about to be hired, that their employment will be a contract for services where the real nature of it is a contract of employment.1 It is also forbidden to sack, or threaten to sack, an employee and then re-hire them as a contractor to do the same, or pretty much the same, work. 2

As usual, the law doesn’t much care which word you use, employee or contractor. The court will make its own decision on that matter, based on the following issues. It is very important to remember, though, that dodging and weaving by not providing any of these things to a worker, so as to avoid calling them an employee, will not cut it with a court.

The court will be looking at the overall picture of the relationship between the worker and your business. You might think not paying a worker regularly will make them a contractor rather than an employee, but the court may decide that the worker is effectively your employee who you have mistreated by not paying regularly.

The issues which the court may take into account include:

  1. Are there set hours per week for the worker, and how is their contract worded? Typically, contracts of employment specify hours, although casual and part-time workers may have flexible hours clauses. Contracts for services are quite different to contracts of employments, and the court will look into any written contracts and their context as part of their determination.
  2. Does the worker get paid leave or, in the case of a casual, do they get the casual loading which substitutes for paid leave? Employees have leave entitlements, contractors usually don’t.
  3. Who directs work? Typically, employees work under the direction and control of management, while contractors are their own boss and just contracted to do a particular task. Contractors can sub-contract work, employees cannot.
  4. How long will the worker be with you? Employees have an expectation of ongoing work, while contractors are only there for a particular task or a set short period.
  5. Who pays the worker’s superannuation contributions? An employee has their super paid by the employer, while a contractor pays their own super.
  6. How is the worker paid and who pays their income tax? Typically, employees get regular pay and have PAYG tax paid by the employer, while contractors issue invoices.
  7. Who is liable where there is a mistake that affects a third party? Employees are not personally liable for claims made by third parties, unless their actions constitute a crime.
  8. Who provides the worker’s tools, uniforms etc? Employees are either provided with the necessary stuff or paid an allowance instead.

In any case, your own business needs will be the main driver of whether you use employees or contractors, but the increasingly strict approach of the courts to this topic means you should be extremely careful about pushing the envelope and trying to characterise employees as contractors.

If there is any doubt in your mind about employment law, you should contact us to get legal advice.

References:

  1. s357 Fair Work Act; Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd [2015] HCA 45; (2015) 256 CLR 137.
  2. s358 Fair Work Act.