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Contractors vs. Employees – Navigating the Minefield

Contractors vs. Employees – Navigating the Minefield
Oct 2016
Business Structures
Intellectual Property
Professional Services

With the rise of Uber and the sharing economy the status of workers has never been more relevant.

Contractors vs. Employees – Navigating the Minefield

Business Structures

With the rise of Uber and the sharing economy the status of workers has never been more relevant. We see a major push from businesses toward a flexible contractor based workforce. Whilst we share many of the commercial views that drive this push (e.g. flexible overheads, encouraging workforce participation and providing on-demand services), business owners must exercise caution not to incorrectly characterise a worker as a contractor when in fact they are an employee.

So what’s the big deal you ask?

In Australia, employees are guaranteed additional protections that an independent contractor is not (or is at least responsible for themselves):

  • Vicarious Liability – an employer is generally vicariously liable for the actions of their employee, whereas liability can be carried by an independent contractor subject to the terms of agreement.
  • OHS – employers have obligations to protect and insure against employee injury.
  • Fair Work Protections – employees are covered by wage, leave and dismissal protections set out in legislation and National Awards.
  • Taxes – employers are responsible for remitting PAYG tax and superannuation for employees.

Given that these obligations can often be enforced against directors of employer entities, it can be costly to both the business and the director if a worker is incorrectly characterised and treated as a contractor (e.g. PAYG and super are not collected and remitted or Award rates are not paid).

Let’s get to the point!

Just because a worker has an ABN does not make them an independent contractor. The Courts will not look favourably on ‘sham’ contractor arrangements and will look at the relationship as a whole to determine the business’ obligations to their worker. The factors include:

  • Ability to Sub-contract – employees cannot subcontract or delegate their work to others. Conversely, contractors can sub-contract, subject to the particular terms of their engagement and the nature of the services provided by the contractor.
  • Payment – employees are ordinarily paid for their time, per activity/job or on a commission. Contractors are ordinarily paid upon completion of a quoted job. Employees are paid a salary and receive payslips, whereas contractors issue invoices.
  • Control – contractors can decide how to perform their contracted work, whereas employees are directed how to perform by employers.
  • Other Work – working solely or primarily within a business suggests an individual is an employee, as contractors typically work outside or independent of an engaging business. Contractors are typically free to accept or refuse additional work or work from other businesses, employees often can’t.
  • Risk – employees typically do not take a share of any profit, nor a risk of any loss, incurred by the business. Contractor relationships may include components of ownership interests or profit distribution entitlements.
  • Tools of Trade – employees typically use their employer’s tools and equipment, whereas contractors often bring their own.

Where workers are clearly independent contractors, then the two most critical risk mitigation points are:

  1. ensure you and your contractors are adequately insured against public liability, professional indemnity and other relevant risks; and
  2. ensure your intellectual property is protected. This can include ensuring that intellectual property created by a contractor is assigned to your business upon creation and/or imposing restraints/non-solicitation provisions on contractors.

You will generally find that the employee vs. contractor debate will only come to light if someone is underpaid or something goes wrong. However, with potentially diabolical consequences for getting it wrong, we stress the need to properly analyse your relationship with workers. Please do not obtain their ABN, pay their invoice and hope for the best.

DISCLAIMER: This post is the opinion of the author and in no way constitutes legal advice.

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