Independent Contractors and Employees

In the broadest strokes, an independent contractor is a company or natural person carrying on their own business and an employee is a natural person who serves in someone else’s business.

An independent contractor, should at a minimum hold an ABN, however incorporating a company and contracting using that entity is often best for all parties involved. Independent contractors should seek advice prior to incorporating a company to fully comprehend those obligations and consequences especially as a director.

Generally, an independent contractor should maintain their own insurance, pay their own tax and meet all required entitlements of their workers (including, the NES, the employee’s tax and insurance, any relevant award, and Superannuation).

A labour hire agreement involves a company being supplied staff from a labour hire provider who must meet any employment obligations owed to the worker. This is commonly done when a company requires staff temporarily. Many states in Australia require labour hire providers to be licensed and there are strict regulations.

The legal question regarding whether a worker is an Independent Contractor or an Employee

This is a complex area of the law that has recently gone through significant changes and unfortunately, there is no black-and-white answer.  Each case turns on its own facts and the legal position as to whether or not a person is a contractor or employee may not be known until a Court, Tribunal, or the Australian Taxation Office makes a finding for that particular matter.  To make matters more difficult, if it is found that a contractor is incorrectly designated, then the newfound employer may be liable for the contractor’s, now employee's, unpaid tax and superannuation or be liable for damages if they injure themselves.

In any given case, whether or not an employer-employee relationship exists is to be derived from the specific agreement in question and potentially the broader and practical relationship between the parties.

Advantages and Disadvantages

Some key considerations for a company to keep in mind when deciding whether to contract with an independent contractor rather than employ an employee are:

Risks of using independent contractors

The main risks that a business owner (usually a company) take if one of their independent contractors is later found, as a matter of law, to be an employee are:

• The company would have failed to withhold and remit PAYG taxation and Superannuation.  The Australian Taxation Office has wide-ranging powers to recover those monies, interest, and penalties from your company and directors personally.  The company may also have some further liability under State payroll taxation laws.
• If a contractor is injured at work and has no insurance, the contractor may then allege that they were in fact an employee and sue the contracting company.  If the contracting company does not have worker's compensation insurance then the contracting company may be liable for a significant sum of damages. 

If you have any questions about independent contractor's arrangements or employment obligations, please contact us on 07 3220 1144 or Hillhouse Legal Partners and we will assist.