When engaging someone to work for you as a contractor, it is important to understand the sometimes fine line that differentiates that contractor from being an employee.
Getting it wrong can be expensive. Not only are there penalties under legislation ( up to $16,500 for individuals and $82,500 for corporations), but employers can be made to pay back-payments and superannuation.
Sometimes it is difficult to establish whether someone is a contractor or employee. As with most most business arrangements, a well drafted contractor agreement whereby both parties acknowledge the relationship of contractor, goes a long way in confirming this relationship and eliminating misunderstandings.
That is not to say that you can deem any relationship one of a contract for services simply by putting it in writing. Disguising an employee as a contractor, known as sham contracting, carries severe penalties and is considered unlawful.
There is no single definition as to what constitutes a contractor.
Whilst a contract will be an important part of assessing the relationship between the parties, the Court will also look beyond the contract and have regard to the totality or the substance of the relationship.
In particularly, those things that point towards an independent contractor are that an independent contractor:-
In contrast, employees perform their work under the direction and control of their employer, and (with the exception of casuals) on an ongoing basis with standard set work hours.
This table breaks down the differences between the two classifications
| Factor | Employee | Independent Contractor |
|---|---|---|
| Control over work | Employer directs how and when work is done | Contractor decides how and when work is done |
| Payment | Regular wage or salary | Paid per task or project |
| Risk | Low financial risk; covered by employer | Bears the financial risk of their own business |
| Equipment | Employer provides tools and equipment | Provides their own tools and equipment |
| Leave entitlements | Entitled to paid leave (annual, sick, etc.) | No entitlement to paid leave |
| Superannuation | Employer must pay superannuation contributions | Responsible for own superannuation arrangements |
Employees are entitled to benefits such as superannuation and paid leave.
Although independent contractors don’t receive the same benefits as employees, such as paid leave or sick days, they are still protected by Australian law. Contractors must still receive a fair wage for their services and are protected from sham contracting under the Fair Work Act. Additionally, contractors are responsible for their own tax, insurance, and superannuation.
If you are unclear about whether a Principal and Contractor relationship exists, a good starting point is Fair Work’s Resource page on Independent Contractors.
If you’re working as an independent contractor, having a clear written contract is essential. This contract should detail the scope of the work, payment terms, and any responsibilities each party holds. A well-drafted agreement ensures both parties understand their obligations and can help resolve disputes more easily.
