Contractor vs Employee

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Adjunct Professor, Dr Brett Davies
Founder, Legal Consolidated

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Contractor vs Employee
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Contractor vs Employee

Many contractors are now employees - under the new rules

You call yourself an independent contractor. Your business operates out of a company. However, the new rules mean that you are still an employee. The Contractor vs Employee question is now murky.

What is an ‘employee?’ What is an ‘independent contractor?’

The desire for flexibility in the workforce muddies the waters. The government classifying an independent contractor as an employee is detrimental to you. This is because employer obligations are lower for an independent contractor.

Take John. He is a partner in a large Accounting house. He assists a client for 12 weeks. John is clearly an independent contractor. The client is the Principal.

But what about where John is a sole proprietor. He does the same work for the client for 12 weeks. It is now likely that John is the client’s employee. What a mess.Employee vs Independent Contractor

“Contract of Service” vs “Contract for Service”

An employee relationship is a “contract of service.” An employee provides services exclusively at the employer’s discretion. A contractor relationship, on the other hand, is a “contract for services.” Contractors work to produce a service or product for the benefit of the Principal.

That seems simple but the government refuses to define either “independent contractor” or “employee.” The result?  Whether a person is an employee is a question of fact. Therefore, Courts look at previous cases to work out whether you are a contractor or an employee.

Traditionally, the High Court used the “control test.” Greater control by the boss implies an employee relationship. In contrast, an employer exercising little control suggests a contractor relationship. However, the test has changed.

The control test is now only one factor. Courts look to four other key factors of the relationship between the boss and the worker. This puts the 1949 case of Humberstone v Northern Timber Mills back in vogue.

In this case, they were:
  1. Payment-payment on a regular basis, as opposed to payment for a particular service, indicates that it is an employee relationship.
  2. Delegation-independent contractors can delegate work to others. However, an employee does the job personally.
  3. Commercial risks-contractors carry their own insurance. They bear the cost of defects in their work. An employee on the other hand usually bears no risk for errors.
  4. Responsibility for equipmentindependent contractors pay for their equipment. In contrast, employees are supplied with equipment. Or they are reimbursed for expenses. 

Does this new approach help?

The new approach blurs the distinction between independent contractor and employee.

Ask yourself: Are you operating your own business? Or are you working for an employer?

Contractor vs Employee? Found to be an independent contractor

A truck falls, a man dies - Humberstone v Northern Timber Mills [1949] HCA 49 389.

Mr Humberstone’s truck fell on him, killing him instantly. Mr Humberstone was an independent contractor, working for Northern Timber Mills. His wife thought otherwise. She believed her husband was an employee. If true, this entitled her to workers compensation.

The battle pursued right up to the High Court.

Mr Humberstone used his own vehicle. He worked the same hours each day. Payment was made weekly based on weight per mileage, as opposed to time spent. On the side of his truck, Mr Humberstone painted: “Humberstone Carriers”. Northern Timber Mills had no control over the way in which Humberstone carried out his work.

The High Court rejected Mrs Humberstone’s claim. Mr Humberstone was an independent contractor. Mrs Humberstone couldn’t get her hands on Northern Timber Mills’ workers compensation.

Contractor vs Employee? Found to be an employee

Illiterate migrant tricked into signing an independent contractor’s agreement - Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd & Ors [2015] HCA 45.

Ms Roden, an illiterate migrant, worked happily as a housekeeper for the company, Quest. One day, Quest prepared a contract for Ms Roden to “get around employment laws”. Ms Roden was an employee, but the contract expressly stated that Ms Roden was an independent contractor. The High Court held that Quest’s actions were a sham that contravened the Fair Work Act:

The High Court stated, “Parties cannot create something which has every feature of a rooster, but call it a duck.” Just because a contract states an individual is an independent contractor, does not mean that they are an independent contractor.

Contractor vs Employee? Five independent insurance agents now employees - and get $500,000 to boot

In  ACE Insurance v Trifunovski [2013] FCAFC 3, five insurance agents sold insurance for Combined Insurance Company of Australia. There were poorly drafted independent contractors agreement explicitly stating that the agents were 'independent contractors'. Two of those contracts were with the agent's company - rather than with the agents individually.

The insurance agents were only allowed to work in set geographical locations. They had to report to the Regional Manager. The Regional Manager was an employee of the insurance company. The agents received no income or retainer. They were rewarded exclusively on commission. (This breaches employment law - if they are employees - because while employees can get commission they must, at least, get the minimum wage or Award rate.)

 

The court noted:
  1. Combined Insurance had an ongoing and intensive training programme that the agents had to partake in
  2. their duties were 'carried out through the personal effort of the individual agent and only by them'
  3. the agents were not allowed to employ anyone else to sell Combined Insurance's insurance on their behalf
  4. the agents were unable to delegate their work
  5. the insurance company was significantly involved in the agents' day-to-day operations - the old 'control' test is still there, but less important
  6. the agents had 'no real independence of action or true independence of organisation'
  7. the poorly drafted contractor agreement was a sham hiding an employment relationship
The Court, however, failed to note the agents:
  1. operated with their own office, car and other work expenses
  2. kept their own hours of work
  3. carried the profit and loss of their 'business' being the sale of insurance

Nevertheless, the Court held the agents were employees of the Combined Insurance Company of Australia. Therefore, the company became responsible for the retrospective payment of:

  1. annual leave
  2. sick leave
  3. long service leave

The Courts didn't seem to know about compulsory superannuation, otherwise, the 5 wise insurance agents would have got superannuation, as well, compliments of their 'employer'.

Legal Consolidated Barristers & Solicitors' Independent Contractors Agreement is superior in that our contracts include:

    • the 'work' referred allows the contractor to sub-contract, subject to approval
    • the principal only has control of the work done, the time limits and cost involved - but not how the work is carried out
    • the contractor provides their own plant or equipment
    • the contractor is paid on results and not merely for the time spent working

 

What you need to do: Contractor vs Employee

Employers need to exercise caution when classifying relationships with their employees. Failure results in the employer’s liability for:

  1. Superannuation charges
  2. Workers compensation
  3. Payroll tax
  4. Back pay
  5. Unfair dismissal

It is not always clear if there is an employment relationship. Businesses must correctly classify their workers as employees or contractors. Make sure you are correct in the classification process. Any error is costly. To ensure the highest possible chance in being an independent contractor, you need to build an independent contractor’s agreement.

On the Legal Consolidated Barristers and Solicitors website you can build:

  1. Independent contractor agreements
  2. Employment contracts

You must have one or the other, not both.

The Contractor vs Employee 5-way test:

Test yourself: are an independent contractor or an employee?

Contractor vs Employee? Employee Contractor
Are you paid based on a set amount per period (this includes award rates, annual salary, and hourly rates)? Yes No
Are you paid based on a quoted price for an agreed outcome? No Yes
Are you responsible for equipment, tools, plant, or motor vehicles? No Yes
Are you paid an allowance to cover expenses for providing tools for work? Yes No
Are you allowed to pay other people to do work for you? No Yes

 

Written by Adjunct Professor, Dr Brett Davies (Partner) and Mia Mher (Graduate), Legal Consolidated Barristers & Solicitors

See also:

 

 

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